Consider Hedging Shopify If You Won’t Take Gains

0
Consider Hedging Shopify If You Won’t Take Gains
<a href="https://pixabay.com/users/StockSnap/">StockSnap</a> / Pixabay

Nice Quarter, But What Next?

Shares of Shopify (SHOP) have now nearly doubled from the March 23 market low, after the company posted 47% revenue growth in its Q1 results.

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q1 2020 hedge fund letters, conferences and more

hedging shopify

Sohn Investment Conference 2021 Coverage: Octahedron Capital, Glenernie Capital

2021 Sohn Investment ConferenceThe following is our rough coverage of the 2021 Sohn Investment Conference, which is being held virtually and features Brad Gerstner, Bill Gurley, Octahedron's Ram Parameswaran, Glenernie's Andrew Nunneley, and Lux's Josh Wolfe. Q1 2021 hedge fund letters, conferences and more Keep checking back as we will be updating this post as the conference goes Read More


Shopify is now an $80 billion market cap company, despite suspending its 2020 guidance last month due to the coronavirus. The company included this slide in its Q1 investor presentation, highlighting how a brick & mortar small business shuttered in the wake of COVID-19 uses Shopify's online store to sell gift cards.

But this seems to also highlight the precariousness of the businesses that are Shopify's customers. How many will still be around if the coronavirus closures drag on? BlackRock's Larry Fink predicts "a wave of bankruptcies" will hit American businesses; presumably the prospects aren't much rosier for other Shopify markets hit hard by the virus.

Given the gloomy economic outlook, Shopify shareholders may want to take their gains here. For those who would rather hold on for a bit more, let's look at a way they can stay long while limiting their downside risk.

Hedging Shopify

One challenge with hedging Shopify is that it's very expensive to do so with protective puts now. For example, if you tried to hedge against a greater-than-18% decline over the next 6 months using our app on Wednesday, you would have gotten this error message.

hedging shopify

Image via the Portfolio Armor iOS app. 

The least expensive put option expiring in November to protect against a >18% decline in SHOP by then cost more than 18% of position value on Wednesday, which is why that error message appeared.

However, if you were willing to cap your upside at 19% over the same time frame, this was the optimal collar to protect against a >18% decline by late November:

hedging shopify

Shop

In this case, the income from the call leg more than offset the cost of the puts, so the net cost was negative, meaning you would have collected a net credit of $680, or 0.93% of position value when opening this hedge, assuming (to be conservative) that you bought the puts and sold the calls at the worst ends of their respective spreads.

Something to consider if you're intent on staying long Shopify.

No posts to display