Unusual Options Activity Hints That a Big Fish Is Rolling Covered Calls on Shopify Stock

The S&P 500 closed at a record high of 7,022.95 on Wednesday, up 0.80%, while the Nasdaq Composite followed suit, up 1.59% to 24,016.02. 

I’m not sure it’s a good thing that investors are looking past the Iran war. The key factor in markets remaining in an upward trajectory is the Strait of Hormuz and how long it remains closed. 

Citadel founder Ken Griffin believes a 6-12-month closure would trigger a global recession—scary stuff. According to the World Bank, there have only been five global recessions in the past 55 years -- 1975, 1982, 1991, 2009, and 2020 -- on average, that’s one every 11 years. A recession in 2026 would mark the third global recession in 17 years, or one every 5.7 years, considerably higher than the 55-year average. 

Yesterday, Reuters reported LSEG data showing that S&P 500 companies earned a combined $605.1 billion in the first quarter, up from $598.7 billion forecast at the start of the ⁠year. There’s an adage that stock prices follow earnings, so I guess that’s good news. 

I’m still skeptical that it’s time to be risk-on, but lots of money is being made by those who believe otherwise. 

But I digress. Today’s commentary is about unusual options activity. 

In yesterday’s action, Shopify (SHOP) had the highest Vol/OI (volume-to-open-interest) ratio at 335.96. I can’t remember the last time there were six options with Vol/OI ratios over 100. Unsurprisingly, the options volume yesterday was 68.4 million, considerably higher than the 90-day average of 58.9 million. Also, not surprisingly, calls represented 64% of the volume. Investors were risk-on in a big way. 

Looking at Shopify’s June 18 $95 call, at first glance, it appears a big fish has taken a very bullish position, going long a whole bunch of $95 calls deep ITM (in-the-money) expiring in a little over two months. 

A closer look suggests the big fish is rolling a Covered Call. Here’s why. 

The Option in Question

Here’s how the long call looked at the close yesterday. The volume of 45,018 was 32% of the 139,776 on the day, which itself was the third-highest single-day volume over the past three months. The June 18 $95 call volume was also 1.3 times Shopify’s 30-day average. It speaks to yesterday’s elevated options activity.

The long call buyer paid $3,715 for the right to buy 100 shares of Shopify stock, using 61% leverage to control $9,500 of the e-commerce platform’s stock.

Deep ITM, the intrinsic value is $32.41 [$127.41 share price - $95 strike price], while the extrinsic or time value is $4.74 [$37.15 ask premium - $32.41 intrinsic value]. Your breakeven is $132.15, 3.72% higher than the $127.41 closing price. 

With an expected move of 18.39% up or down by June 18, on the upside, you’re looking at $150.84, an annualized return of nearly 287% [$150.84 share price - $132.15 breakeven / $37.15 ask premium * 365 / 64]. If you bought the shares at $127.41 and sold 64 days later at $150.84, your annualized return would be not quite 105%.

So, if you’re bullish on Shopify, it’s not a crazy play. 

The Big Fish Rolling the Covered Calls

When you look at yesterday’s action for the June $18 $95 call, you see that the 45,018 in volume consisted of one 45,000 trade at 12 noon ET and 15 others (3 at 2 contracts and 12 at 1 contract).

Now, if you then look at the options flow, you see the 45,000 trade and a 40,000 trade on the May 15 $85 call at precisely the same time.

One explanation for what’s happening here is that the trader is rolling the covered call -- this involves owning the stock and selling a call for premium income -- up and out, which means they’re buying the 40,000 May 15 $85 calls at $40.50 per contract to close the position, and selling 45,000 June 18 $95 calls at $34.10 to open a new short position for income. 

The up is the $5 increase in strike price; the out is the one-month increase in time. 

Why would somebody do this? For a couple of reasons.

First, they’re sitting on a nice profit on the $85 calls, a position they may have entered in late March, smack dab in the middle of the Iran war, when the share price bottomed around $110.61. At that time, with a bid price of around $30, the premium income on 40,000 would be $120 million. The cost to buy the 40,000 calls and close the position would be $162 million. Rolling up and out with an additional 5,000 calls would generate $153 million in premium income, yielding a net gain of $111 million. 

Also, let’s not forget that the shares they actually own to cover the calls may have acquired long ago, when Shopify shares traded well under $100. They could be sitting on significant profits from those shares. To generate income on top of capital gains is the icing on the cake. 

Another reason for going up and out is to avoid the risk of assignment. 

Let’s say once more that they sold the 40,000 May 15 $85 calls when the share price was around $110.61 in late March. SHOP stock has appreciated by 15% in the past two weeks. The buyer of the calls is sitting on a nice gain; by going up and out, they give themselves more time to benefit from the stock's continued appreciation because the buyer of the 45,000 calls will be less likely to exercise their right immediately, given the newness of the position, the higher strike price, and the need to get to their breakeven around $129.

Shopify has approximately 1.3 billion shares outstanding. The 45,000 June 18 $95 calls represent about 0.3% of its shares. Assuming the big fish actually owns about double that amount, say 9 million, that’s a $1.15 billion position. If it were able to replicate the $111 million gain discussed earlier once a quarter, that would be a major boost to its annual total return.

And remember, Shopify doesn’t pay a dividend, so rolling covered calls is a nice income replacement tool for big fish institutional investors.