Shopify Flashing Bullish Options Signal Before Earnings

SHOP options are attractively priced right now, particularly on the call side

Jul 23, 2018 at 2:33 PM
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The shares of cloud-based commerce concern Shopify Inc (NYSE:SHOP) are set for their highest close ever today, up 0.8% to trade at $173.18. The stock has essentially erased its late-June retreat that stemmed from an unfavorable Supreme Court ruling -- up more than 18% so far in July -- and last week notched a record intraday high of $175.29. What's more, SHOP stock is sending up a historical "buy" signal right now, and near-term options are relatively cheap, even with earnings just around the corner.

SHOP stock chart july 23

Since going public in mid-2015, there have been eight other times where Shopify stock was flirting with new highs and still sported a Schaeffer's Volatility Index (SVI) in the bottom 20% of its annual range (indicating near-term options are pricing in relatively low volatility expectations for SHOP). After those signals, the security was higher one month later 75% of the time, averaging a healthy gain of 8.75%, per data from Schaeffer's Senior Quantitative Analyst Rocky White. A similar pop from current levels would put SHOP around $188.

Traders looking to speculate on SHOP's short-term trajectory with call options will be pleased to know the stock's 30-day implied volatility skew of 11.1% is in the 91st percentile of its annual range. This indicates that near-term Shopify calls have rarely been cheaper compared to puts in the past year. The weekly 8/10 172.50-strike call was last asked at $9.80, meaning buyers would need SHOP stock to topple $182.30 (strike plus premium paid) by the close on Friday, Aug. 10, when the options expire.

Despite the equity's run at record highs, several analysts remain skeptical of SHOP. Specifically, seven of 18 brokerage firms maintain tepid "hold" or "sell" ratings. Likewise, the average 12-month price target of $150.46 represents a discount of more than 10% to the stock's current price. Should Shopify report strong earnings next Tuesday, July 31, a round of upgrades or additional price-target hikes -- Barclays today upped its target to $155 from $125 -- could lure more buyers to the table.

A strong earnings showing could also spook some shorts. Short interest accounts for more than 12% of SHOP's total available float, and would take more than a week to buy back, at the equity's average pace of trading. That's more than enough for a short squeeze to propel the shares higher.

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