Shopify (SHOP) Cash-Secured Put Option Play Offers Attractive One-Month Yield
A strategy involving a cash-secured put option on Shopify, Inc. (SHOP), offers a potential one-month yield of 4.5%. The put strike price is set 7% below the stock's closing price on Friday, October 3rd, providing downside protection and an attractive expected return (ER). This play results in a lower breakeven point of 11%.
Understanding the Strategy
SHOP stock closed at $161.14 per share on Friday, Oct. 3. Considering the stock's current peak, investors might find shorting out-of-the-money (OTM) puts an attractive way to establish a potential lower buy-in point.
Reviewing Last Month's SHOP Put Option Play
A similar strategy was discussed in a previous Barchart article on Sept. 7, titled “Analysts Keep Raising Shopify's Targets - Make a 3.0% Yield in One-Month SHOP OTM Puts.” The article highlighted Shopify's potential value based on its strong free cash flow (FCF).
The previous recommendation involved shorting the $141.00 put option expiring Oct. 10 for $4.35, resulting in an immediate 3.09% yield. With the put premium now at just 33 cents, it is suggested to roll over the play for another month after a 92% yield on the initial investment.
Updated Price Target for SHOP Stock
A new price target for SHOP stock has been calculated based on estimated free cash flow (FCF) for the next 12 months (NTM), using the FCF margin (FCF/estimated revenue). This FCF projection is then divided by an FCF yield metric to determine market value, which is compared to today's market cap.
Analysts project revenue of $11.27 billion for 2025 and $13.79 billion in 2026. Using a weighted average (¼ of 2025 and ¾ of 2026), the NTM revenue is estimated at $13.16 billion.
Applying an 18.5% FCF margin (slightly higher than the TTM FCF margin of 18.14%) results in an estimated NTM FCF of $2.4346 billion.
Assuming the market would grant SHOP stock a 1% dividend yield if 100% of this FCF was paid out to shareholders:
$2.4346b / 0.01 = $243.36 billion market value
This is 16% higher than the current market cap of $209.741 billion, based on data from Yahoo! Finance.
Therefore, SHOP stock is estimated to be worth 16% more:
$161.14 x 1.16 = $186.92
This represents a 5.3% increase compared to last month's price target of $177.58.
