Off the chart, Shopify (NYSE:SHOP) has delivered once again. But bullish investors would be wise to not ignore the increased risks on the price chart and to use an options-based modified fence strategy to limit and reduce risk versus owning SHOP stock. Let me explain.
Shopify announced an earnings beat Tuesday morning, punctuated by a surprise profit and more good things to come for the hotly contested multi-channel e-commerce platform.
By the numbers, SHOP stock reported an adjusted profit of 2 cents versus Street estimates for a 3-cent loss. On the top-line, SHOP delivered a revenue beat of $10 million on sales of $245 million for its second quarter marking a 62% jump over the same quarter a year prior.
Looking forward, Shopify offered positive news with its modestly above-views sales guidance of $253 million to $257 million versus forecasts of $253.2 million.
But in Tuesday’s early going, conditions are a good deal less-benevolent for SHOP stock bulls. Despite a couple prior sessions of aggressive profit-taking trimming roughly 15% from Shopify’s market-leading performance in 2018, shares are off another 4% now, and as much as 8% this morning, in volatile trade.
So what’s going on? Some may see bearish short-sellers, which make up about 8.5% of SHOP stock as finally being vindicated. But for like-minded investors who believe in Shopify’s business model and growth prospects, the other possibility is SHOP stock may be heeding the historical precedent of today’s price action being more or less “business as usual” for a growth stock like Shopify.
SHOP Stock Weekly Price Chart
It had to happen, and it does appear to be happening right now. I’m referring to a third-straight session of profit-taking and corrective move in SHOP stock which has peeled roughly 22% off shares. So where does that leave bullish SHOP investors? Given Shopify’s multiple bases and possible technical fatigue since breaking out from a large cup pattern nearly two years ago, shares are at risk of a bit more technical pressure.
Bottom line, healthy corrections of around 30% in growth stocks are par for the course. Thus, the number investors may want to think about $123.62. I’d then suggest looking to the options market in SHOP stock for a limited and reduced risk strategy in the more likely event history rhymes rather than perfectly repeats itself.
SHOP Stock Modified Bullish Fence
For investors who agree it’s not time to throw caution to the wind, but who want to be positioned long in case a larger correction doesn’t unveil itself just yet, a modified fence strategy should be of interest.
The limited and reduced-risk position sells an out-of-the-money bull put spread which helps finance an upside call or bull call spread. The trader can set up the combination nearer to a full-blown 30% correction while still maintaining long stock exposure just in case a rhyming situation occurs and perfection is M.I.A.
Reviewing SHOP stock’s options and with shares near $137.50, one modified fence that looks attractive is selling the Sep $125/$120 put spread and purchasing the Sep $150/$160 call vertical for a debit of $1.
At expiration, the investor would forfeit the small debit if Shopify shares are between $125 to $150. Above $150, the opportunity for a decent profit exists as the position is long a $10 vertical. Thus, after accounting for the $1 cost of the fence, $9 in profit can be captured above $160.
What if SHOP stock falls below $125? The limited-risk put spread allows this investor to consider buying shares as they approach a corrective move of 30% with barely a ding to the P&L up to that point. And should a decline in Shopify shares grow larger, risk is contained to $6, or roughly 4% of SHOP stock exposure below $120. Bottom line, that’s a nice way to shop the drop with improved odds.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
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