Affirm Holdings, a Zacks Rank #1 (Strong Buy), is a financial technology company specializing in payment solutions that provide consumers with flexible, transparent installment loans. By partnering with a diverse range of merchants, Affirm enables customers to pay for purchases over time.

The stock is displaying relative strength over the past year. The price movement is a sign of strength as we head further into 2025. Increasing volume has attracted investor attention as buying pressure accumulates in this top-ranked stock.

Affirm is part of the Zacks Financial Transaction Services industry group, which currently ranks in the top 33% out of more than 250 industries. Because this group is ranked in the top half of all Zacks Ranked Industries, we expect it to outperform the market over the next 3 to 6 months, just as it has so far this year:

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Note the favorable metrics for this industry group below:

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Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.

It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market. By focusing on leading stocks within the top industries, we can dramatically improve our stock-picking success.

Affirm Renews Partnership with Shopify

Affirm Holdings operates a payment network in the United States, Canada, and internationally. Its platform includes point-of-sale payment solutions for consumers and merchants along with a consumer-focused app.

The company boasts over 337,000 active merchants covering small businesses, large enterprises, direct-to-consumer brands, and brick-and-mortar stores. Its tools help merchants to boost sales and enhance customer engagement.

Affirm recently renewed a multi-year partnership with Shopify, a global provider of internet infrastructure for commerce. The partnership helps cement Affirm’s position as the exclusive buy now, pay later provider for Shop Pay Installments in the US and Canada, with plans to enter the United Kingdom and other markets worldwide.

Earnings Trends and Future Estimates

Affirm AFRM has built up an impressive reporting history, surpassing earnings estimates in seven of the past eight quarters. The company delivered a trailing four-quarter average surprise of 84.1%.

Earlier in February, Affirm reported fiscal second-quarter earnings of $0.23 per share, a 215% surprise over the -$0.20/share consensus estimate. Revenues of $866.38 million exceeded projections by 7.7%. Higher transactions, robust repeat customer engagement and a successful holiday shopping season also boosted performance.

Analysts are bullish on the stock and have raised current-quarter earnings estimates by 30.77% in the past 60 days. The fiscal Q3 Zacks Consensus Estimate now stands at -$0.09 per share, reflecting growth of 79.1% relative to the year-ago period.

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Option Essentials

While there are many ways to take advantage of a bullish move in AFRM stock, options provide us with flexibility, enabling us to tailor our strategy to the current market environment.

When done correctly, trading options provides huge profit opportunities with limited risk making options one of the most versatile investment vehicles.

Before we analyze today’s trade, let’s review some option fundamentals as a refresher. There is no need to worry about complex mathematical formulas or equations. Over the years I’ve found that the more complicated a strategy is, the less likely it is to work over the long run.

Options are standardized contracts that give the buyer the right – but not the obligation – to buy or sell the underlying stock at a fixed price, which is known as the strike price. A call option gives the buyer the right to buy a particular security, while a put option gives the buyer the right to sell the same. The investor who purchases an option, whether a put or call, is the option buyer, while the investor who sells a put or call is the seller or writer.

These contracts are valid for a specific period of time which ends on expiration day. There are weekly options, monthly options, and even LEAPS options which are longer-term options that have an expiration date of greater than one year.

Option spreads can be an extremely effective strategy. Debit spreads are implemented by purchasing a call option and selling a related call option with a higher strike price. These types of trades are limited risk trades because the short option is ‘covered’ by the option purchase.

Below we’re going to explore a call option spread strategy.

The Power of Option Spreads

Affirm Holdings has been outperforming over the past year and currently meets our criteria for initiating a bullish call option spread position. The company is witnessing positive earnings estimate revisions, which our research has shown to be the most powerful force impacting stock prices.

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The table below displays the risk/reward profile for this trade. AFRM is trading at $61.72/share at the time of this writing. This trade involves purchasing the April 50-strike call at 13.6 points (yellow box), and selling the April 55-strike call at 10.1 points (orange box) for a total cost of 3.5 points. As option contracts represent 100 shares of the underlying security, this would translate to a total cost of just $350 per spread (brown box).

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The top (blue) row in the lower section shows the performance of AFRM stock based on different percentage scenarios at expiration. The last (purple) row shows the corresponding percentage return for our debit spread trade. We can see that regardless of whether AFRM increases in price, remains flat, or even loses 10% from our entry, our option spread trade will produce a 42.9% return.

These are types of odds I like to have in my favor when trading options.

Advantages of Spread Trading

1) The Option Sale Provides Downside Protection

The sale of a call option results in cash being credited to your brokerage account. This reduces the cost basis of the option purchase and provides downside protection in the event the price of the underlying stock declines.

2) Risk is Reduced

In the AFRM trade just presented, the sale of the 55-strike call reduced the risk of the 50-strike purchase from $1,360 to just $350 per contract.

3) Allows Us to Maintain Positions During Volatile Markets

The downside protection provided by the call option sale helps us maintain our spread trade during heightened volatility. Naked option purchases may force us to sell early in order to prevent large losses.

4) Spreads Can Be Profitable If Stock Goes Up or Down

Option spreads can be profitable even if the underlying stock decreases or remains flat, providing us with an entirely new dimension of money-making opportunities.

Remember that the call option sold through this strategy profits as the price of the underlying stock declines, providing us with a cushion during market pullbacks.

Option spreads are a safe way to use the leverage inherent in options. Your risk is limited to the price paid for the spread. The call option spread strategy is an excellent way to take advantage of the bullish move in AFRM as the stock looks primed to continue its outperformance.

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This article originally published on Zacks Investment Research (zacks.com).

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