Yesterday we previewed Square (SQ) earnings and detailed two different ways to play for a move higher. One was bullish looking out to year end and the other was, using the technical term, “kind of bullish”. With the stock higher let’s check in on both. First, the bullish call spread. Here it was, from yesterday:
SQ ($41.85) Buy Dec 29th 42 / 50 call spread for $2
-Buy to open 1 Dec 29th 42 call for 2.25
With the stock 44.65 this call spread is worth 3.40 so a nice profit. It’s got a lot of room to run to the upside still so those looking to stay in the trade this is fairly binary with a breakeven very near to where the stock is currently trading. Of course, more money is now at risk, so those looking to take some of the profits while keeping the upside potential into year end could simply roll the 42 call up to the 45 strike. That raises the breakeven but takes about half of the overall risk off the table. This may be the type of thing you wait on, see how the stock does in next few days and then re-assess overall risk. The current trade is heavy on deltas so it would be the most bang for the buck if the stock continued higher.
Now to the call calendar:
SQ ($41.85) Buy the Dec / Jan 45 call calendar for 90 cents
-Sell to open 1 Dec 45 call at 70 cents
-Buy to open 1 Jan 45 call for 1.60
With the stock 44.65 this trade idea is in great shape, worth nearly 1.50. The short Dec calls are currently worth nearly 2.00, so a lot of premium that could come in on this in the next few weeks if the stock stalls. Those short Dec calls will decay at a much faster rate than the Jan calls so the stock staying in this area is best for this trade. Slight pullbacks are fine as well, but any strong move higher (above 45) and this trade may need to be rolled to a higher strike. For now, patience should pay off and use a stop above 45 (to roll) or a stop below, if it looks like this rally fails, to simply take profits and move on.