from the desk of Dr. Terry F Allen

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An AFRMation Trade

Affirm Holdings (AFRM) provides a platform for point-of-sale payments for consumers and merchants. In August, AFRM announced a partnership with Amazon.com (AMZN) to offer flexible payment solutions to customers with AMZN purchases above $50. AFRM reported earnings on Wednesday after the bell that missed on profits but beat on revenue. The company also raised sales guidance.

Wall Street apparently forgave the earnings miss, largely because it was not clear if the discrepancy used comparable numbers. Moreover, AFRM said its AMZN relationship as a buy-now-pay-later service was exclusive. Clearly, analysts were looking at AFRM’s growth prospects, as the company was greeted with several target price upgrades that reached as high as $185 (the stock closed at $149 on Friday).

After a nasty, four-day 21% plunge heading into earnings that pulled the stock to its 50-day moving average, the stock rebounded 13.7% the day after the earnings news. Given the earnings rebound, analyst target upgrades and deal with AMZN, we are going with a bullish trade on AFRM that keys on the stock maintaining its three-month rally and staying atop its 50-day moving average (blue line in chart). The short put strike of our credit spread sits at $133 (red line in chart), just below the 50-day.

If you agree that AFRM will continue its uptrend and stay atop its 50-day moving average line in chart), consider the following trade that relies on the stock remaining above $133  (through expiration in seven weeks.

Buy to Open AFRM 31Dec 128 put (AFRM211231P128)
Sell to Open AFRM 31Dec 133 put (AFRM211231P133) for a credit of $1.85 (selling a vertical)

This credit is $0.05 less than the mid-point of the option spread when AFRM was trading at $149. Unless the stock rises quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $183.70. This trade reduces your buying power by $500 and makes your net investment $316.30 ($500 – $183.70) for one spread.  If AFRM closes above $133 on December 31, both options will expire worthless and your return on the spread would be 58% ($183.70/$316.30).

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