Bull put spreads continue to work well in this market. So today we’re looking at another example with Shopify (SHOP). This trade in Shopify stock could earn $90 per contract immediately.
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Najarian Explains How To Put On Options For Profit And Protection
Shopify recently broke out to a new high. Plus, Shopify is showing a rising Relative Strength Rating of 87. That’s up from a middling 54 four weeks ago.
Traders who think Shopify stock will stay above 70 for the next few months could look at a bull put spread.
Shopify Stock Today: An Options Setup
As a reminder, a bull put spread is a defined risk strategy. That is, you always know the worst-case scenario in advance. This type of trade will profit if Shopify stock trades sideways or higher. And sometimes the trade can profit even if the underlying stock trades slightly lower.
With Shopify stock trading around 83, if we use the Dec. 20 expiration options, we can sell a put option with a 70 strike price. Then we could buy a 65 put for around $0.90, based on recent trading. Selling this spread would generate roughly $90 in premium with a maximum risk of $410.
If the spread expires worthless, the trade would generate a 22% return in just over two months, provided Shopify stock holds above 70 at expiration. The maximum loss would occur if Shopify stock closes below 65 on Dec. 20. This would see the premium seller lose $410 on the trade.
Break-Even Price
The break-even point for the trade in Shopify stock is 69.10, calculated as 70 less the $0.90 option premium per contract.
I would set a stop-loss if the loss equals the amount of premium received, in this case $90.
Sticking to this stop loss level will help avoid large losses if the trade in Shopify stock goes south.
Shopify Stock: Excellent IBD Ratings
According to IBD Stock Checkup, SHOP ranks No. 5 in its group and has a Composite Rating of 97, an EPS Rating of 99 and a Relative Strength Rating of 87.
Shopify is due to report earnings in late October, so this trade would have earnings risk if held to expiration.
Please remember that options are risky, and investors can lose 100% of their investment. Also, this article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
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