Sofi a buy? Yes! With covered calls

12 Mei 2022

Sofi has been beaten down harder than a bowl of scrambled eggs. Down a whopping 81% from its high last year in the exuberant weeks following its IPO, all of those VC investors surely pumped and dumped while laughing at the ridiculous multiples. Sofi is in a major downward wedge which will pop from pent up demand - at some point. But that is not the point of this idea. The point is that Sofi is in a position to return stable, protected returns now.

Before getting that that, I will mention a few macro items at play here but if you want a full set of pros and cons as to the major headwinds and tailwinds that I see for Sofi. As always, you can just go to one of the many pump and dump sites that are run by the big boys to cause panic, confusion and misguidance in your decision making. Here is a great example from Seeking Alpha: why you should sell Sofi and why you should buy Sofi, both released within 24 hours. (please make up your mind SA)

Macros:

• Obviously the environment with the Fed / rates / etc. has been weighing on growth stocks recently, no one has been safe. Investors have been pulling capital out of companies that are not profitable at ridiculous rates. The risk of a recession would be a nightmare for Sofi and remains, IMHO, the largest risk to this young and not-quite-profitable company
  
• Biden keeps deferring student loan payments, Sofi is slowly shifting from a student loan company to a real bank but they haven't quite limited their asymmetrical downside exposure to the student loan space with other lines of business quite yet
  

So is SOFI a buy?
It does not matter. Right now, deep ITM call options have such a ridiculously high premium that buying Sofi and selling ITM covered calls each week will return 2-5% PER WEEK. Quickly breaking this down.

• As of right now, Sofi is trading at $5.6
  
• 5/20 covered calls @ $5 strike are trading for $0.77 - while that limits your weekly gain to $0.17 (5 + .77 - 5.6), that $0.17 equates to a 3% return that is guaranteed as long as Sofi stays above $5 through 5/20 and you don't lose unless Sofi is under $4.83
  
• Want a little more upside with calls closer to at the money? 5/20 covered calls @ $5.5 strike are trading for $0.44 - while that limits your weekly gain to $0.34 (5.5 + .44 - 5.6), that $0.34 allows for an up to 7.4% return. With the recent volatility in Sofi recently I would shy against this unless, of course, you have conviction in the stock (or steel cajones).
  

Again, these numbers are PER WEEK with relatively large downside protection (in particular for deep IMT calls).

Contrary to the direction in the chart, Sofi won't go down forever. Perhaps it will bottom out closer to $2-3 but these ridiculous premiums allow holding Sofi Long and to be able to profit along the way and to be ready for unprotected upside once this volatility comes to an end.

In fact, there are a bunch of recently IPO'd companies in similar positions right now where you can take advantage of this strategy (LMND, ABNB, etc.). Do your research, find one that works for you and see if you set yourself up with a nice long position to ride out these turbulent times with covered calls.