This Trader Is Covering Their Basis

Hey Traders,

Online brokerage and financial services company SoFi Technologies (Ticker: SOFI) recently launched its own ETF … and if you’ve been looking for a way to cash in on all the latest trending stocks, well, this could be what you’re waiting for.

(Alternatively, if you’re looking for a way to cash in on the upcoming changes in the global economy by smart plays on commodities and volatility, there’s a limited-time opportunity for you here …)

The SoFi Social 50 (Ticker: SFYF) invests in the top 50 stocks currently held by the customers using its platform. This means not only does the ETF give you a bite of the big-league ‘trendy’ trades like Apple (Ticker: AAPL) and Tesla (Ticker: TSLA), but you’ll also get a heavy dose of meme stocks like GameStop (Ticker: GME) and AMC Entertainment (Ticker: AMC) — the latter of which actually happens to be the ETF’s largest holding.

But perhaps the most interesting investment opportunity in SoFi is … well, SOFI itself. With a market cap of $15 billion, and intriguing long-term growth potential, it shouldn’t be surprising the shares are attracting the attention of institutional investors.

One in particular made quite an interesting trade on the stock yesterday …

And it looks like they have some decisions to make by Friday.

FinTech newcomer SOFI is still a market rookie, appearing on the Nasdaq for the first time at the beginning of June, and it’s lock-up expiration only occurred two days ago on Monday, June 28 (which allows early shareholders to divest their shares). In light of the expiration, it’s not entirely surprising the shares saw some downward pressure during Tuesday’s trading, opening at $20.52 and closing at $18.87.

But the slight share price dip wasn’t what caught my eye …

On Tuesday, one trader made a Big Money move on SOFI, selling 1,499 contracts of the July 2 10-strike calls at $9.35. For the call buyer, that means SOFI will need to break back above $19.35 for the calls to become profitable.

These contracts represent 149,900 shares of SOFI, and by selling these calls, this trader banked a whopping $1,401,565!

But … this is where it gets interesting.

Because at the same time, this trader purchased 149,900 shares of SOFI outright for $19.38! 

Purchasing the shares alone would have required an outlay of $2,905,062, but the sale of the covered calls brought the total purchase price down to $1,503,497 – a per share cost of just $10.03.

Selling a call option while simultaneously purchasing shares of the underlying is a strategy known as a “buy-write” transaction, with the result being that the trader now has a covered call on SOFI.

Covered calls typically present a couple different advantages for traders– for instance, now this trader has reduced their capital at risk from buying the shares outright. The call also serves as a short-term hedge, and this trader can now generate income by writing options against their shares (as long as they’re still in possession of the shares).

However, in this case, these calls are currently deep in-the-money, so the trader does have a real risk of their sold options being exercised upon expiration.

So perhaps this trader expects SOFI to hit new lows on the charts by the end of the week, pushing the calls out-of-the-money?

Chart courtesy StockCharts

That seems somewhat unlikely … 

However, remember, the breakeven price for the call buyer is actually $19.35 ($10 strike price plus the $9.35 premium paid). Should SOFI stay below $19.35, there is a pretty decent chance these calls will not be exercised. 

In this case, the trader holding the shares could then continue to sell more covered calls, and collect more premium, or sell the shares outright. Since their actual cost for the shares was only $10.03, selling the shares for any price over that would result in a net profit.

Let’s say SOFI actually rises in price. What then?

Well, if the call buyer chooses to exercise their options, the most the call seller has to lose is $4,497. Since the call seller is obligated to sell the shares at the strike price of $10, they are looking at a potential $9.38 loss per share, given their $19.38 purchase price. However, the $9.35 per share premium paid covers most of this loss, meaning they have less than $5k at risk.

Alternatively, it could be that this trader simply wanted to hold SOFI shares short-term without shelling out nearly $3 million. Selling the in-the-money calls in this case gave the trader enough income to cover almost half of the cost of owning the shares.

Yet another option is this trader could expect the price of calls to drop ahead of expiration, allowing them to buy back their call position at a cheaper price, and pocket the difference in premiums. Given that SOFI’s 30-day at-the-money implied volatility (IV) hit a 52-week high on Tuesday, it isn’t necessarily overly far-fetched to think that IV will decline in the days ahead, and consequently, options prices will drop.

Either way, it seems this Big Money trader has some decisions to make by Friday!

Your Only Option,

Mark Sebastian

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