Traders Change Their Tune as Shopify Inc (SHOP) Sinks

Shopify Inc (SHOP) is selling off on potential competition from Facebook Inc (FB)

Oct 12, 2015 at 2:03 PM
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Shopify Inc (NYSE:SHOP) is sinking in tandem with business partner Twitter (NYSE:TWTR), down 16.9% at $30.78. Exacerbating the losses is Facebook Inc's (NASDAQ:FB) foray into e-commerce, as the company is currently testing a "shop" section -- hinting at potential competition for Shopify. Amid SHOP's drop -- which has it on the short-sale restricted list -- options volume has accelerated.

Currently, the stock's options are changing hands at triple the expected intraday rate. Digging deeper, the November 30 put is the most active strike, and all indications point to buy-to-open activity. In other words, these traders foresee SHOP extending its decline south of $30 by the close on Friday, Nov. 20, when back-month options expire. On the charts, the shares haven't breached this level since mid-September, and delta on the out-of-the-money strike is negative 0.41 -- indicating a 41% chance the put will be in the money at expiration.

Taking a step back, traders in recent weeks have been buying to open calls over puts a breakneck pace. SHOP's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio checks in at a top-heavy 9.61 -- with nearly 10 calls bought to open for each put. Two weeks ago, this ratio was a much tamer 1.08, with bullish and bearish bets initiated at roughly the same pace.

There are two potential reasons for the uptick in bullish wagering. For one, Shopify Inc (NYSE:SHOP) had been a technical beast prior to today -- outpacing the broader S&P 500 Index (SPX) by close to 32 percentage points during the past month. For another, short interest exploded 55.5% higher during the latest reporting period, and represents over one-tenth of the equity's total float. In other words, some of these short sellers may have purchased long calls to hedge against an extended ascent in SHOP shares.

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