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Bullish SoFi (SOFI) Option Spread For Upside Catalysts Ahead
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Biden's administration's promise to forgive student debt looks more and more like a pipe dream every day. With the pandemic-driven student loan deferment program concluding in May, 43 million Americans afflicted by this educational debt will be looking to refinance.
I've got an astute options trading pay in SoFi (SOFI - Free Report) - conceivably the most significant beneficiary of this approaching loan refinancing tidal wave - to take advantage of this clear-cut catalyst.
I'm looking at a bullish option spread that will maximize upside potential and minimize upfront costs.
The Catalyst
Americans currently hold an unprecedented $1.6 trillion in federal student loans and an additional $130 billion in private academic loans. Refinancing is topping priority lists with interest rates sizable below 2019 levels.
Gen Zs, Millennials, and Gen Xers hold $115.5 billion, $500.5 billion, and $601.7 billion in respective national student loan debt, making up 78% of the US's total educational obligations. These young tech-savvy individuals will be utilizing SoFi's easy-to-use leading consumer finance platform (focused initially on only student loans) with the promise of relatively lower rates (and a rate match guarantee).
The US government's student loan deferment programs are concluding at the end of May, providing a perfect medium-term option play in SoFi, which is poised to explode as individuals race to refinance before rates head any higher.
SoFi's recently approved banking charter materially lowers this fintech powerhouse's cost of lending, unlocking an incredible margin-expanding opportunity at the perfect time while providing customers with market-low borrowing rates.
The January sell-off drove momentum-chasing short-sellers into this ultra-high-growth fintech innovator, cutting its value in half in just a few months. SOFI is a target for short-selling hedge funds due to its unprofitable fintech orientations (becoming a saturated space), r/WallStreetBets fueled volatility and the now tabooed notion that it went public via SPAC.
SOFI is looking ripe for both a trade and a long-term buy at its heavily undervalued share price. I'm looking at near-term price targets between $20 and $30 a share.
The Trade
I'm trading monthly June options to ensure that I capture the loan deferment expirations and the firm's subsequent two earnings reports. There are a few different ways to approach this bullish trade, but considering the significant volatility that SOFI has experienced in its first year of public trading, I'm looking to do so in a way that also captures some of the rich theta embedded in these options (theta explained below).
My SOFI trade is a three-legged play that generates an immediate credit to your account with minimal downside risk.
Below is the SOFI option spread that I propose (quoted in this order: action taken, expiration date, strike price, option type, followed by cost per share):
Buy June 17 $20 calls: -$0.80 + write (sell) June 17 $12.50 puts: $2.90 + buy June 17 $10 puts: -$1.60 = +$50 credit immediately
Let's break this trade down. I'm buying June calls, with a $20 strike on the projection that SOFI will be north of my price target range as my previously mentioned catalysts come to fruition.
I added a bullish June put spread into this trade to take advantage of the outsized implied volatility (IV). This spread safely captures SOFI options' rich theta and adds an immediate $130 credit, which more than covers the $80 premium of the $20 strike call (remember that options premiums are quoted at the per-share cost, but each contract represents 100 shares). This put spread alone has a $130 upside while only risking $120.
The combined 3-legged spread has the potential to generate between $300 and $800 if this $20+ target is met, while risking a maximum of $200 per spread if SOFI drops below $10 into expiration. This trade will be profitable as long SOFI is above $12.50 into June (a highly likely scenario).
If you want to reduce the complications of the put spread addition, just buy the monthly June calls in SOFI (or the underlying stock, for that matter). This stock looks poised to take flight following its highly anticipated bank charter and the impending student loan refinancing catalyst, so buying the outright stock here would be prudent.
The Greeks To Know
Theta represents the time-value depreciation of an option's premium each day under the assumption the underlying security does not move. Theta can be seen as the daily return on written options (options that you sold or short-options).
It represents the expected daily returns of a written option, assuming that the strike price is not reached prior to expirations. Theta (quoted as a negative figure) and implied volatility are directly correlated on an absolute value basis (disregarding -/+ signs).
Theta and Vega, an option's sensitivity to implied volatility, are the most meaningful metrics to focus on when implementing a covered call strategy. As an option seller, we want theta (expected daily returns) to be high on an absolute basis, while Vega (volatility risk) remains low.
When assessing opportunities to sell options, I'm looking for contracts with an IV of 50% or higher in combination with a Theta to Vega ratio that exceeds 0.25. The higher the Theta Vega ratio, the better the risk/reward outlay for option sellers (no matter what your strategy).
The Business
The enterprise provides over 4,200 financially-focused products to nearly 3 million customers, from personalized credit card options to refinancing student loans and a slew of novel investing products (including the opportunity to get in on previously exclusive IPO prices), SoFi does it all.
This consumer fintech giant has been anything but idle amid the pandemic, with hundreds of new products being added to the platform every quarter, which has driven its memberships up prolifically.
The company has accelerated its membership growth for the past 8 consecutive quarters, exhibiting 96% customer expansion in Q3, on the back of 113% in the prior quarter.
This fintech innovator is driving excellent year-over-year (YoY) revenue appreciation and has achieved 5 consecutive quarters of positive EBITDA as the business rushed towards profitability. Analysts are currently estimating full-year profits as soon as next year.
SOFI went public via one of Chamath Palihapitiya's illustrious Social Capital SPAC mergers. Chamath has taken such names as Virgin Galactic (SPCE - Free Report) , Clover Health (CLOV - Free Report) and Opendoor (OPEN - Free Report) onto the public exchanges through the convoluted SPAC merger process. Each of these deals gained massive interest on Reddit's market-moving r/WallStreetBets (WSB) message board, where millions of young traders are coming together to promote their favorite equities 'to the moon.'
Chamath plays into WSB’s "Occupy Wallstreet" narrative, with his dogmatic beliefs regarding asymmetric access to information and capital that Wall Street holds over individual investors. His conveniently aligned viewpoints with this new investing cohort have allowed Chamath to profit heavily from WSB engagement in his blank-check companies.
Final Thought on SoFi
SOFI has finally dipped below 10x forward P/S (sitting at 7.5x), positioning it nicely for a safer value-oriented entry point. Analysts are starting to get bullish on this stock, with price targets ranging from $20 to $30 a share. 7 out of 8 analysts call SOFI a buy today with 0 sell ratings.
SoFi is successfully executing on its growth narrative in a way that I have never seen before, providing market participants with excellent topline visibility and ample reason to get in while the stock is still cheap.
SOFI needs to shake this broader fintech drag with the recent PayPal (PYPL - Free Report) earnings disaster not helping, despite this fintech pioneer's problems being more company-specific than the market admits. Q4 earnings will be revealed on March 1st, and I expect to see a bullish springboard price action from its heavily discounted valuation today.
Now is the perfect time to start a position in this revolutionary fintech company poised to thrive in the Roaring 20s.
Image: Bigstock
Bullish SoFi (SOFI) Option Spread For Upside Catalysts Ahead
Biden's administration's promise to forgive student debt looks more and more like a pipe dream every day. With the pandemic-driven student loan deferment program concluding in May, 43 million Americans afflicted by this educational debt will be looking to refinance.
I've got an astute options trading pay in SoFi (SOFI - Free Report) - conceivably the most significant beneficiary of this approaching loan refinancing tidal wave - to take advantage of this clear-cut catalyst.
I'm looking at a bullish option spread that will maximize upside potential and minimize upfront costs.
The Catalyst
Americans currently hold an unprecedented $1.6 trillion in federal student loans and an additional $130 billion in private academic loans. Refinancing is topping priority lists with interest rates sizable below 2019 levels.
Gen Zs, Millennials, and Gen Xers hold $115.5 billion, $500.5 billion, and $601.7 billion in respective national student loan debt, making up 78% of the US's total educational obligations. These young tech-savvy individuals will be utilizing SoFi's easy-to-use leading consumer finance platform (focused initially on only student loans) with the promise of relatively lower rates (and a rate match guarantee).
The US government's student loan deferment programs are concluding at the end of May, providing a perfect medium-term option play in SoFi, which is poised to explode as individuals race to refinance before rates head any higher.
SoFi's recently approved banking charter materially lowers this fintech powerhouse's cost of lending, unlocking an incredible margin-expanding opportunity at the perfect time while providing customers with market-low borrowing rates.
The January sell-off drove momentum-chasing short-sellers into this ultra-high-growth fintech innovator, cutting its value in half in just a few months. SOFI is a target for short-selling hedge funds due to its unprofitable fintech orientations (becoming a saturated space), r/WallStreetBets fueled volatility and the now tabooed notion that it went public via SPAC.
SOFI is looking ripe for both a trade and a long-term buy at its heavily undervalued share price. I'm looking at near-term price targets between $20 and $30 a share.
The Trade
I'm trading monthly June options to ensure that I capture the loan deferment expirations and the firm's subsequent two earnings reports. There are a few different ways to approach this bullish trade, but considering the significant volatility that SOFI has experienced in its first year of public trading, I'm looking to do so in a way that also captures some of the rich theta embedded in these options (theta explained below).
My SOFI trade is a three-legged play that generates an immediate credit to your account with minimal downside risk.
Below is the SOFI option spread that I propose (quoted in this order: action taken, expiration date, strike price, option type, followed by cost per share):
Buy June 17 $20 calls: -$0.80 + write (sell) June 17 $12.50 puts: $2.90 + buy June 17 $10 puts: -$1.60 = +$50 credit immediately
Let's break this trade down. I'm buying June calls, with a $20 strike on the projection that SOFI will be north of my price target range as my previously mentioned catalysts come to fruition.
I added a bullish June put spread into this trade to take advantage of the outsized implied volatility (IV). This spread safely captures SOFI options' rich theta and adds an immediate $130 credit, which more than covers the $80 premium of the $20 strike call (remember that options premiums are quoted at the per-share cost, but each contract represents 100 shares). This put spread alone has a $130 upside while only risking $120.
The combined 3-legged spread has the potential to generate between $300 and $800 if this $20+ target is met, while risking a maximum of $200 per spread if SOFI drops below $10 into expiration. This trade will be profitable as long SOFI is above $12.50 into June (a highly likely scenario).
If you want to reduce the complications of the put spread addition, just buy the monthly June calls in SOFI (or the underlying stock, for that matter). This stock looks poised to take flight following its highly anticipated bank charter and the impending student loan refinancing catalyst, so buying the outright stock here would be prudent.
The Greeks To Know
Theta represents the time-value depreciation of an option's premium each day under the assumption the underlying security does not move. Theta can be seen as the daily return on written options (options that you sold or short-options).
It represents the expected daily returns of a written option, assuming that the strike price is not reached prior to expirations. Theta (quoted as a negative figure) and implied volatility are directly correlated on an absolute value basis (disregarding -/+ signs).
Theta and Vega, an option's sensitivity to implied volatility, are the most meaningful metrics to focus on when implementing a covered call strategy. As an option seller, we want theta (expected daily returns) to be high on an absolute basis, while Vega (volatility risk) remains low.
When assessing opportunities to sell options, I'm looking for contracts with an IV of 50% or higher in combination with a Theta to Vega ratio that exceeds 0.25. The higher the Theta Vega ratio, the better the risk/reward outlay for option sellers (no matter what your strategy).
The Business
The enterprise provides over 4,200 financially-focused products to nearly 3 million customers, from personalized credit card options to refinancing student loans and a slew of novel investing products (including the opportunity to get in on previously exclusive IPO prices), SoFi does it all.
This consumer fintech giant has been anything but idle amid the pandemic, with hundreds of new products being added to the platform every quarter, which has driven its memberships up prolifically.
The company has accelerated its membership growth for the past 8 consecutive quarters, exhibiting 96% customer expansion in Q3, on the back of 113% in the prior quarter.
This fintech innovator is driving excellent year-over-year (YoY) revenue appreciation and has achieved 5 consecutive quarters of positive EBITDA as the business rushed towards profitability. Analysts are currently estimating full-year profits as soon as next year.
SOFI went public via one of Chamath Palihapitiya's illustrious Social Capital SPAC mergers. Chamath has taken such names as Virgin Galactic (SPCE - Free Report) , Clover Health (CLOV - Free Report) and Opendoor (OPEN - Free Report) onto the public exchanges through the convoluted SPAC merger process. Each of these deals gained massive interest on Reddit's market-moving r/WallStreetBets (WSB) message board, where millions of young traders are coming together to promote their favorite equities 'to the moon.'
Chamath plays into WSB’s "Occupy Wallstreet" narrative, with his dogmatic beliefs regarding asymmetric access to information and capital that Wall Street holds over individual investors. His conveniently aligned viewpoints with this new investing cohort have allowed Chamath to profit heavily from WSB engagement in his blank-check companies.
Final Thought on SoFi
SOFI has finally dipped below 10x forward P/S (sitting at 7.5x), positioning it nicely for a safer value-oriented entry point. Analysts are starting to get bullish on this stock, with price targets ranging from $20 to $30 a share. 7 out of 8 analysts call SOFI a buy today with 0 sell ratings.
SoFi is successfully executing on its growth narrative in a way that I have never seen before, providing market participants with excellent topline visibility and ample reason to get in while the stock is still cheap.
SOFI needs to shake this broader fintech drag with the recent PayPal (PYPL - Free Report) earnings disaster not helping, despite this fintech pioneer's problems being more company-specific than the market admits. Q4 earnings will be revealed on March 1st, and I expect to see a bullish springboard price action from its heavily discounted valuation today.
Now is the perfect time to start a position in this revolutionary fintech company poised to thrive in the Roaring 20s.
Happy Trading
Dan
Equity Strategist & Manager of The Headline Trader Portfolio @ Zacks Investment Research