You don’t need a stock to move in order to profit
Shopify (SHOP) stock has traded in a 35-45 range since the start of August. For an options trader who thinks Shopify shares can stay in that range, a short strangler options trade is a way to make a profit if that’s the case.
Why a short choke?
A short choke profits if Shopify stock stays within a trading range. This option trading strategy involves selling an out-of-the-money put and an out-of-the-money call with the same expiration date.
This trade generates a large amount of premium for the option seller, but it carries risk. A short choke is an unprotected trade, sometimes referred to as a “naked” trade. Naked options can be risky because they expose the trader to potentially unlimited losses if the stock makes a big move in either direction.
However, if the trader is right and SHOP shares are trading sideways, big gains are also possible.
Trade setup for Shopify Stock
With Shopify stock trading just below 40, a short choke could use a 36 put and a 46 call both with September expiries.
Yesterday put 36 was trading at around $1.75 and call 46 at around $1.35.
The sale of these two options generates a total of $310 in premium. This is the maximum possible gain on the trade if the SHOP stock closes between 36 and 46 on the expiry day.
To calculate the breakeven price of the trade, take the strike prices plus and minus the total premium received of $3.10 per share. This sets the equilibrium prices for the short bottleneck at 32.90 and 49.10. Breaking out of this range at expiration results in losses.
A short choke is an advanced strategy
This trade is a short vega trade. This means that an increase in implied volatility at the start of the trade is bad for profits. Right now, implied volatility for Shopify shares is around 72%, which is above the average of the past 12 months.
Short chokes are an advanced option strategy, so if this all sounds confusing, it’s best not to trade them.
With a trade like this, the potential losses are unlimited and far greater than the potential gains, so traders would want to be very confident that the stock is going to hold steady during the trade.
According IBD Stock CheckSHOP stock ranks 47th in its group and has a composite score of 32, one EPS Ranking of 53 and one Relative strength rating of 8.
Remember that options are risky and investors can lose 100% of their investment.
Gavin McMaster holds a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to success. trade. Follow him on Twitter at@OptiontradinIQ
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