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Shopify (SHOP) earnings preview, expected move, directional and neutral spreads.
4 min read

Shopify (SHOP) earnings preview, expected move, directional and neutral spreads.

Shopify (SHOP) earnings preview, expected move, directional and neutral spreads.

  • Shopify (SHOP) reports June quarter earnings before the open Wednesday (~7:00am)
  • Options are pricing an expected move of +/-7.5% by this Friday, a little more than half of the expected move over the next month, about +/-13%.
  • The trading session following the prior earnings (in April) SHOP was higher by +7%.
  • Of the last 10 earnings events, SHOP stock has moved inline or less than the expected move on 9 of the following trading sessions.
  • On the one that went beyond the expected move (February '20) it was more than double the expected move (+20% higher) intraday, before reversing and closing just +8% higher.

The Set-up

Here is the 1 month expected move chart for SHOP, with this Friday's expiration highlighted (+/-7.5%), via Options AI technology:

So about $75 in either direction.

Ways to Play

Neutral - First let's look at neutral strategies, based on the expected move, that isolate the earnings itself, expiring this Friday, via Options AI technology:

The first thing to notice (and the reason I used animation) is just how wild the calculations of the mid point prices can be, even when setting up the trade. That is due to the fact that these options have wide widths, not uncommon when trading out of the money strikes on a stock that is nearly 1000 points. Once prices settled a bit here's how those trades looked:

In the case of the +910/-920/-1060/+1070 Iron Condor that is about the right risk reward for that trade. It's essentially risking 1/1 that the stock stays within its expected move into Friday.

Educational note - The reason the max gain of a condor is the total credit received of both spreads, whereas the max risk is the width of 1 spread (the wider of the two if they are not equal width) is because the stock can only be beyond the range in one direction on expiration, not both. Therefore one side will always expire worthless, at max gain, even if the other side is max loss.

The Butterfly is specifically targeting its center strike (990) and profits would trail off on any move away from that level. Since the stock is close to a big round number, centering the fly at 1000 is a super neutral way to target for a pin exactly at the 1000 level, in case the stock wants to return to that level even after a move higher or lower on the event:

Bullish - For those thinking directionally the expected move can be used to help determine strike selection. Here's some trades based on a bullish price target looking out a bit further in time, beyond earnings, to August (monthly) expiration. The bullish consensus is about $1100 in August, this compares several trades to buying 100 shares of stock:

Each of those trades could be adjusted based on risk tolerance but the short put spread and the long call spread are essentially mirror images of each other, one buying the move to the expected move, the other selling the expected move in the other direction (to the bears).

Bearish - Going the other direction in August, (bearish expected move about $880) we can see these trades, via Options AI technology:

Here's the chart of the +1010/-890 put spread, note the breakeven at about 962.50:

And the breakdown of what those strikes look like, the sale of the 890 puts greatly finances and takes the sting away of the purchase of the 1010 puts.

But of course the breakeven is lower, thus the 35% probability of profit. SHOP is likely to swing around a bit today so the exact strikes of the expected move will change into tomorrow, but the percentage moves will be roughly the same.

Previously:

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