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Shopify Inc (SHOP) stock has been a favorite of traders who short out-of-the-money puts with high short-put yields and long-term call option buyers. However, analysts are still raising their price targets as the company's free cash flow and FCF margins are so strong.
SHOP stock was at $115.68 in midday trading on Monday, Dec. 9, up over +28.5% from Nov. 11 ($89.99), before its Q3 earnings and FCF figures on Nov. 12.
However, its value is still higher, as I discussed in the Nov. 17 Barchart article, “Shopify Stock Looks Cheap as Its FCF Rises Next Year - Buy LEAPS and Short OTM Puts.”
Based on its underlying FCF margins and analysts' revenue forecasts, the article showed that SHOP stock could be worth $157 per share. At the time SHOP was at $108.49, so this was +45% higher. Today it still represents a +35.7% potential gain for investors.
Moreover, analysts are still raising their price targets. For example, a month ago AnaChart.com reported that the average price target of 34 analysts was $114.88. Today, the average is $126.30 per share.
Trading Strategy Worked
At the time, I wrote that shorting out-of-the-money (OTM) near-term puts and buying long-term in-the-money (ITM) calls could be a good balanced strategy.
For example, the Dec. 13 expiration put options with a $105 strike price had a $2.35 bid-side premium. That provided a 2.23% yield to the short-seller (i.e., $2.35/$105.00) for the next three weeks.
Today those puts are trading for just 12 cents on the ask side. So, the short-seller has made most of that income with no obligation to buy shares at $105.00. It makes to roll that trade over and short options that have a 3-week further away expiry period. (Note that the delta ratio at the time was -34%, so there was little chance of the stock falling to this strike price.)
Moreover, I also discussed buying long-term calls that were in-the-money (ITM), i.e., the Jan. 16, 2026, expiration calls with a $100.00 strike price, when SHOP was at $108.49. That means it was $8.49 in the money, but the midprice premium was $28.03 at the time.
Today, the premium is $33.03. So, an investor has already made $5.00 ($33.03-$28.03), or +17.8%. Note that SHOP has risen $7.19 ($115.68-$108.49), or just +6.6%. That shows the leverage you have with long-term ITM calls.
(Note also the delta ratio was 0.696, or about 70%, and the ITM calls have risen 69.5% of the trading price rise (i.e., $5.00/$7.19).
In summary, the investor has made about 2% shorting puts and 17.8% buying long-term ITM calls, or +20% over the last 3 weeks. The net return has been $2.35-$0.12, or $2.23/$105.00 (i.e., 2.12%) in short income and a net $5.00/28.03, or $17.8% in unrealized call income, for a total +19.92% over the past 3 weeks or so.
So, today it makes sense to repeat this play with similar strike price points (based on delta ratios).
Shorting OTM Puts and Buying ITM Long-Term Calls Again
For example, here is another play: sell short the Jan. 3, 2025, $113.00 strike price puts for $2.54, and buy the $105.00 Jan. 16, 2026 calls at the midprice of $30.60.
Here is how that works. The short-put play brings in $2.54 or a yield of 2.24% (i.e., $2.54/$113.00). Note the delta ratio is similar to before at -36%, indicating a little over ⅓ chance of the stock falling to this price and having the cash-secured put assigned to the investor.
Using this income, the investor can buy the $105.00 in-the-money (ITM) calls expiring over a year later on Jan. 16, 2026, for $30.60, for a net price of $28.06. That means the breakeven price is $105+$28.06, or $133.06, which is 15.2% higher than today's trading price.
That means the investor hopes the stock will rise at least 15% over the next year. Given the high price targets mentioned above, that seems possible.
Note that the calls are over 9% in-the-money (ITM) (i.e., $105/$115.46-1 = -.091), and the delta ratio is over about 70%, roughly similar to the prior play above.
Moreover, now that the investor has done two short-put trades, the extra income has lowered the breakeven price to $133.06-$2.23 (from the prior short-put trade), or $130.83. That is only 13.3% over today's price.
The bottom line is that this OTM short-put and ITM long-call play seems to be a good way to take advantage of Shopify's higher underlying value.
