Shopify broke out to a multi-month high Wednesday with a strong bullish candle. Traders looking for a more conservative way to play Shopify stock via options could use a bull put spread.
Shopify provides a multi-tenant, cloud-based, multichannel commerce platform for small and medium-size businesses.
According to Investor's Business Daily's IBD Stock Checkup, Shopify ranks second in its group. It also has a Composite Rating of 95, an Earnings Per Share Rating of 95 and a Relative Strength Rating of 92.
Further, Shopify stock currently sits above its rising 21-day, 50-day and 200-day moving averages.
Defined Risk In Bull Put Spreads
As a reminder, a bull put spread is a defined risk strategy, which means you always know the worst-case scenario in advance. This type of trade will profit if Shopify stock trades sideways or higher — and even sometimes if it trades slightly lower — offering flexibility in uncertain markets.
The strategy involves simultaneously selling a higher-strike put option while buying a lower-strike put option in the same expiration cycle. In exchange for selling the bull put spread, the trader receives the option premium and has risk equal to the difference in strike prices, less the premium received.
Traders that think Shopify will stay above 100 for the next few weeks could sell an Aug. 15 bull put spread, running from 95 to 100, for around 65 cents a share. Selling this spread under a 100-share contract would generate roughly $65 in premium with a maximum risk of $435.
If the spread expires worthless, that would be a 14.95% return in around one month, provided Shopify stock is above 100 at expiration. Meanwhile, the maximum loss would occur if Shopify stock closes below 95 on Aug. 15, which would see the premium seller lose $435 on the trade.
The break-even point for the trade is 99.35, which is calculated as 100 less the 65-cent option premium. That's also 17% below Wednesday's closing price.
Shopify Stock: Where To Set A Stop-Loss
It's best to set a stop-loss if the stock breaks back below 105, or if the spread increases in value from 65 cents to $1.30. Further, sticking to this stop-loss level will help avoid large losses if the trade goes south.
For investors seeking income generation with defined risk parameters, this Shopify bull put spread also presents an appealing opportunity in the current market environment.
Please 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, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
