Shopify stock has gained nearly 13% in the last month and was added to the SwingTrader portfolio Wednesday, though it still around 11% below its 52-week high. One way to take ownership of a stock for less than the current price is via a cash-secured put option trade.
Shopify provides a cloud-based commerce platform for small and medium-sized businesses via a subscription for merchants. The company's strategic shift toward larger enterprise clients — including private firms like Reebok and Barnes & Noble — aims to stabilize revenue and ensure long-term growth.
Additionally, Shopify's aggressive implementation of artificial intelligence tools, such as an AI-powered store builder and enhanced commerce assistant, positions it at the forefront of e-commerce innovation.
Let's take a look at how a cash secured put trade might look on Shopify stock. As a reminder, a cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
Goals With A Cash-Secured Put
The goal is to either have the put expire worthless and keep the premium, or to be assigned and acquire the stock below the current price. Anyone selling puts understands that they may be assigned 100 shares at the strike price.
Let's assume we're happy to buy 100 shares in Shopify stock at a price of 105 any time between now and Aug. 15. Selling one put contract at a strike price of 105 and expiration of Aug. 15 let's us collect $510 in premium while we wait. The put seller of the contract has the obligation to purchase 100 shares of Shopify stock at 105 if called upon to do so by the put buyer.
The break-even price for the trade comes by taking the strike price less the premium received. In this case, that gives a break-even price of 99.90, or 12.7% below Wednesday's closing price.
If the stock stays above 105 at expiry, the put expires worthless. That leaves the trader with a 5.1% return on capital at risk. That works out to around 36% on an annualized basis.
Losses Partially Offset By Premium
The main risk with the trade is similar to outright stock ownership. If the stock falls sharply, the trade suffers a loss. But the loss is partially offset by the premium received for selling the put.
The maximum loss on the trade would occur in the unlikely event that Shopify stock fell to zero. The trade would lose $9,990 in that situation, but of course most traders would cut their losses before then.
Cash-secured puts are a fantastic way to generate a high return on stocks the investor is happy to own.
If the put does get assigned, the investor takes ownership with a reduced cost base. The investor can then begin selling covered calls to generate additional income from the position.
Shopify Stock Ratings, Ranking
According to the IBD Stock Checkup, Shopify stock ranks third in its group. It boasts a Composite Rating of 96, an Earnings Per Share Rating of 95 and a Relative Strength Rating of 88.
Shopify plans to announce second-quarter earnings in early August, so an earnings risk goes along with this trade.
This bull-put spread on Celestica and this cash-secured put on StoneCo are both working well so far.
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, 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.
