Shopify Pre-Earnings Option Trade Offers 224% Annual Return

Shopify (SHOP) stock is set to report earnings on Tuesday before the opening bell, and the options market is pricing in a 13.9% move in either direction.


Today, we’re looking at selling a cash secured put to take advantage of the high implied volatility around the earnings announcement.

Last week’s trade on Uber Technologies (UBER) worked well, as did the one published Jan. 29 on (AMZN).

A cash-secured put involves selling an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.

The goal is to either have the put expire worthless and keep the premium, or to take assignment and acquire the stock below the current price.

They are very similar to a covered call and are quite easy to understand once you know the basics.

Traders May Need To Buy SHOP Stock

It’s important that anyone selling puts understands they may be assigned 100 shares at the strike price.

For Shopify stock, a trader selling the Feb. 16 put with a strike price of 85 late Friday would generate around $3.50 in premium per contract.

The put seller would have the obligation to purchase 100 shares of SHOP stock at 85 if called upon to do so by the put buyer.

The break-even price for the trade can be calculated by taking the strike price less the premium received. In this case gives a break-even price of 81.50.

That’s 10.16% below Friday’s closing price.

224% Return On SHOP Stock Trade

If the stock stays above 85 at expiry, the put option expires worthless. It leaves the trader with a healthy 4.29% return on capital at risk. That works out to around 224% on an annualized basis.

The main risk with the trade is similar to outright stock ownership. If the stock falls significantly, the trade will suffer a loss, however the loss will be partially offset by the premium received for selling the put.

Cash secured puts are a fantastic way to generate a return on stocks the trader is happy to own.

With this example, the trader either generates a 4.29% return in a week, or they get to purchase SHOP stock at a reasonable discount to Friday’s price.

If Shopify trades below 85 and the put gets assigned, investors can then sell covered calls against the position to generate further income.

Shopify No. 1 In Its Group

According to the IBD Stock Checkup, SHOP stock is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 98 and a Relative Strength Rating of 95.

It’s important to remember that options are risky and investors can lose 100% of their investment.

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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