Market Overview

A Potentially Profitable Options Trade In Shopify

A Potentially Profitable Options Trade In Shopify

Shopify Inc (NASDAQ: SHOP) has arguably been the stock to own in 2020. Buoyed by a global flight to e-commerce as a result of COVID-19, shares of the e-commerce platform for small businesses are up 43% in 2020. 

Source: Market Chameleon

The Underlying Stock: Relative Strength

As you can see from the table below, SHOP has massively outperformed the S&P 500. While the stock sold off in March with the rest of the market, it has since rallied 130% to new all-time highs. 

Source: Market Chameleon

With the stock rising as much as it has, there are bound to be people on both sides of the trade. If you aren’t sure whether the stock will continue going up or come crashing down to earth, here is an options trade for you. 

The Options Strategy: Credit Iron Condor

The trade card below outlines a credit iron condor, a strategy of buying and selling a put option and a call option to express a neutral view on a stock. 

Source: Market Chameleon

This strategy involves four legs. You would buy a put option with a strike price of $615, sell a put option with a strike price of $690, sell a call option with a strike of $755, and buy a call option with a strike of $830. 

Based on Shopify’s historical price data, this iron condor has a 75% probability of profit. Also, putting this spread on will leave you with a theoretical edge (the expected average return of the trade) of 20.7%. 

Payout Diagram

Source: Market Chameleon

The graph above is a payout diagram for this strategy. As you can see, the trade is profitable as long as shares of SHOP are between $664.10 (the strike of the put being sold minus premium received) and $780.90 (the strike of the call being sold plus premium received) by May 22. 

The maximum profit from this trade is $2,590 (the credit received for selling the spread), and occurs if SHOP is between $690-$755 at expiration. The maximum loss is $2,375 (the credit received minus the widest width of the spread) and occurs if both puts are in the money.

The Takeaway: 

Iron condors are a great way to take advantage of elevated implied volatility. SHOP’s current IV is at 58, which puts it in the 77% percentile over the previous 52 weeks. This trade allows you to collect premium off the expectation that the stock’s expected move is greater than the actual move by May 22. 

All data as of the close on May 11, 2020

Photo by Roberto Cortese on Unsplash


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Posted-In: Credit Iron Condor Market Chameleon ShopifyLong Ideas Options Markets Trading Ideas