SoFi Option Bullish Spread (SOFI) for Upside Catalysts

By Virginia J. Ruiz On Feb 2, 2022

The Biden administration’s promise to cancel student debt looks more and more like a pipe dream every day. With the student loan deferral program ending due to the pandemic in May, 43 million Americans affected by this student loan debt will seek refinance.

– Zacks

I have a shrewd options trading salary in SoFi SOFI – probably the biggest beneficiary of this approaching loan refinancing tidal wave – to take advantage of this clear catalyst.

I envision 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 another $130 billion in private college loans. Refinancing tops the priority lists with interest rates well below 2019 levels.

Gen Z, Millennials, and Gen X hold $115.5 billion, $500.5 billion, and $601.7 billion in national student loan debt, respectively, representing 78% of the total education obligations of United States. These tech-savvy young people will use SoFi’s easy-to-use, industry-leading consumer lending platform (initially focused solely on student loans) with the promise of relatively lower rates (and a rate-matching guarantee) .

The US government’s student loan deferral programs end in late May, providing a perfect medium-term option set in SoFi, which is poised to explode as individuals rush to refinance before rates hit. climb.

SoFi’s recently approved banking charter significantly lowers the cost of lending for this fintech powerhouse, opening up an incredible opportunity for margin expansion at the perfect time while providing customers with market-low borrowing rates.

The January sell-off sent short sellers looking for momentum in this super-high-growth fintech innovator, halving its value in just a few months. SOFI is a target for short-selling hedge funds due to its unprofitable fintech orientations (becoming a saturated space), volatility fueled by r/WallStreetBets, and the now-taboo notion that it went public via SPAC.

SOFI looks ripe for a long-term trade and buy at its heavily undervalued share price. I’m looking at short-term price targets between $20 and $30 per share.

The exchange

I trade June monthly options to ensure I capture loan deferral expirations and the company’s two subsequent earnings reports. There are a number of ways to approach this bullish trade, but given the significant volatility SOFI has experienced in its first year of public trading, I am 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-pronged game that generates immediate credit to your account with minimal downside risk.

Below is the SOFI option spread I offer (quoted in this order: action taken, expiration date, strike price, option type, followed by cost per share):

Purchase of $20 call options on June 17: -$0.80 + write (sell) of $12.50 put options on June 17: $2.90 + purchase of put options of $10 from June 17: -$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 target price range as my previously mentioned catalysts materialize.

I added a bullish June sell spread into this trade to take advantage of the outsized implied volatility (IV). This spread safely captures the rich theta of SOFI options and adds an immediate $130 credit, which more than covers the $80 premium of the $20 strike call (remember options premiums quoted at cost per share, but each contract represents 100 shares). This put spread alone has a $130 advantage while only risking $120.

The combined 3-leg spread has the potential to generate between $300 and $800 if that $20+ target is hit, while risking a maximum of $200 per spread if SOFI falls below $10 until expiration. This trade will be profitable as long as SOFI is above $12.50 in June (a very likely scenario).

If you want to reduce the complications of adding sell spread, simply buy the monthly June calls in SOFI (or the underlying stock, for that matter). This stock looks set to take off following its highly anticipated bank charter and impending student loan refinance catalyst, so it would be prudent to buy the stock outright here.

The Greeks to know

Theta represents the depreciation in the time value of an option’s premium each day assuming the underlying security does not move. Theta can be thought of as the daily return of sold options (options you sold or short options).

It represents the expected daily returns of a written option, assuming that the strike price is not reached before the expirations. Theta (quoted as a negative number) 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 options seller, we want theta (expected daily returns) to be high in absolute terms, while Vega (volatility risk) remains low.

When evaluating option writing opportunities, I look for contracts with a VI of 50% or greater in combination with a Theta to Vega ratio greater than 0.25. The higher the Theta Vega ratio, the better the risk/reward expense for options sellers (regardless of your strategy).

Deals

The company provides more than 4,200 finance-focused products to nearly 3 million customers, from personalized credit card options to student loan refinancing and a host of new investment products (including the ability to benefit from previously exclusive IPO prices), SoFi does it all.

This mainstream fintech giant has been anything but idle amid the pandemic, with hundreds of new products being added to the platform every quarter, driving its membership prolifically.

The company has accelerated membership growth for the past 8 consecutive quarters, posting a 96% increase in customer base in the third quarter, compared to 113% in the previous quarter.

This fintech innovator generates excellent year-over-year (YoY) revenue appreciation and has achieved 5 consecutive quarters of positive EBITDA as the company races towards profitability. Analysts currently estimate full-year earnings as early as next year.

SOFI went public through one of Chamath Palihapitiya’s illustrious share capital SPAC mergers. Chamath took names such as Virgin Galactic SPCE, Clover Health CLOV and Opendoor OPEN on public exchanges through PSPC’s convoluted merger process. Each of these trades has generated massive interest on Reddit’s r/WallStreetBets (WSB) message board, where millions of young traders gather to promote their favorite “over the moon” stocks.

Chamath plays into WSB’s “Occupy Wallstreet” narrative, with its dogmatic beliefs about the asymmetrical access to information and capital that Wall Street holds about individual investors. His views conveniently aligned with this new cohort of investors allowed Chamath to benefit greatly from WSB’s commitment to his blank check companies.

Final Thoughts on SoFi

SOFI eventually dipped below 10x P/S forward (sitting at 7.5x), positioning it well for a safer value-focused entry point. Analysts are starting to be bullish on this stock, with price targets ranging from $20 to $30 per share. 7 out of 8 analysts call SOFI a buy today with 0 sell odds.

SoFi is successfully executing its growth story in a way I’ve never seen before, giving market participants excellent revenue visibility and plenty of reasons to get in while the stock is still good. Marlet.

SOFI needs to shake off this wider brake on fintech, with the recent PayPal PYPL revenue disaster not helping, although this fintech pioneer’s problems are more company-specific than the market admits. Fourth quarter results will be released on March 1 and I expect to see bullish springboard price action from its sharply reduced valuation today.

Now is the perfect time to start a role at this groundbreaking fintech company poised to thrive in the Roaring Twenties.

Good negotiation

Dan

Equity Strategist and Portfolio Manager The Headline Trader @ Zacks Investment Research

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SoFi Option Bullish Spread (SOFI) for Upside Catalysts

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