Update – Square (SQ) Dancin’

by CC November 10, 2017 1:38 pm • Trade Updates

The other day we previewed Square’s (SQ) earnings and offered two trade ideas into the event, a hedge for long holders and a stock alternative for those looking to buy the stock but with defined risk. With the stock higher let’s check back in on the trades. First, the collar against long stock (From Nov 7th):

Hedge against 100 shares of SQ long at $37: Buy Nov 34 / 40 collar for even money

-Sell to open 1 Nov 40 call at 65 cents

-Buy to open 1 Nov 34 put for 65 cents

With the stock 39.25 and one week until this hedge expires, the stock has obviously made 2.25, and the hedge has cost about .50. So not bad, but it could be better if the stock stays below 40 for the next week because as long as the stock closes at 40 or below next Friday, the hedge will have cost nothing, and all the gains of the stock remain. That’s the ideal situation with a zero cost collar (protecting the stock but ideally not giving up any gains on a hedge) and as far as management for the next week I think it makes sense to simply keep a stop on those short calls at the point where the go in the money and the stock is at or above 40. As long as the stock is below, let those things rot to zero.

Ok, now let’s check in on the stock alternative:

SQ ($37) Sell the Jan 33 put to Buy the Jan 40 / 46 call spread for even money

-Sell to open 1 Jan 33 put at 1.25

-Buy to open 1 Jan 40 call for 1.80

-Sell to open 1 Jan 46 call at 55 cents

With the stock 39.25 this trade is worth about a dollar. Like the collar, 40is the pivotal strike here, but unlike the collar, it has months to get above that level. In this case the trade is profitable by a dollar, but that is based on soft deltas, and if the stock were in the same spot on January expiration as it is now, that dollar would be gone and this would be worthless. As far as trade management non eof that in the money, or out of the money status means much. But as we head towards year end it will start to matter more and being patient will only pay off if the stock continues higher. If it gets stuck in the mud the sooner you take profits on the trade the better.