Shareholders could be buying options insurance on the soaring stock
Shopify Inc (NYSE:SHOP) will report earnings before the open tomorrow, Feb. 12. Ahead of the report, SHOP shares are flirting with new record highs, and while analysts expect even more upside ahead, options traders are bracing for a pullback.
Shopify stock was last seen 1.2% higher to trade at $178.06, after earlier notching an all-time best of $180. Bolstering the equity today is a price-target hike to $180 from $159 at RBC. Since breaching the $120 level on Dec. 24, SHOP shares have been in rally mode, soaring almost 50% and bolting north of a trendline connecting lower highs since July. In fact, the security ended higher in seven of the last eight sessions, and its 14-day Relative Strength Index (RSI) now stands at 71 -- in overbought territory.
It's no surprise, then, to find most analysts are already in the bulls' corner, with SHOP sporting 13 "buy" or better opinions. However, eight brokerage firms still maintain tepid "hold" or "sell" ratings, leaving the door open for analyst upgrades, should tomorrow's earnings report meet or exceed expectations. What's more, additional price-target hikes could be on the horizon; the consensus 12-month price target of $165.42 represents a discount of more than 7% to SHOP's current price.
A short squeeze could also propel the security to new heights. Short interest on SHOP fell 8.8% in the most recent reporting period, but still represents a healthy 8.6% of the stock's total available float. At the equity's average pace of trading, it would take more than six sessions to repurchase the rest of these pessimistic positions.
As alluded to earlier, options traders are also wary. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity has racked up a 10-day put/call volume ratio of 1.76 -- in the 89th percentile of its annual range. In other words, Shopify option buyers have bought to open puts over calls at a much faster-than-usual pace in the past two weeks.
That trend is continuing today. SHOP has seen more than 7,800 puts cross the tape already -- three times its average afternoon pace. Most active is the February 175 put, where it seems traders are buying the option to open. The put will move into the money if SHOP stock breaches $175 by the close on Friday, Feb. 15, when front-month options expire -- which obviously encompasses the company's upcoming earnings release.
However, considering SHOP's massive ascent recently -- not to mention the shares soared 12% the day after Shopify's last earnings release -- some of the recent put buying could be attributable to shareholders seeking options insurance ahead of earnings. By purchasing protective puts, traders can lock in gains in the event of a negative earnings reaction.
Whatever the motive, the equity's short-term options were still attractively priced as of Friday's close, especially with earnings on the horizon. The stock's Schaeffer's Volatility Index (SVI) of 52% is in just the 29th percentile of its annual range, pointing to relatively mild volatility expectations being priced into SHOP's near-term contracts.