Update – Square (SQ) On a Tear

by Dan November 21, 2017 3:09 pm • Trade Updates

Last Thursday when Square (SQ) was trading at then all-time highs just below $42, we detailed some of the recent newsflow and optimism that has been driving investor interest in the stock which as I write has resulted in nearly 250% year to date gains.

On Wednesday, November 15th SQ announced that they are testing a service by letting some customers buy and sell bitcoin on their Cash App, which is largely the result of the 10% move in the stock since then.

Here was my take on the stock in Thursday’s post:

So my take on the stock is fairly simple, the company is doing little wrong, shown signs of risk-taking that might yield outsized rewards, and investors are willing to share some of that risk. For those who are asking can this stock continue its torrid gains in 2018 then I think the NVDA example above is worth keeping in the back of your head. But what about between now and year end? Without a broad market sell-off I see little reason why this stock will not keep going higher, and as long as Bitcoin keeps its upward momentum and broader adoption then the investor will clearly get a little giddy about the opportunity for SQ in 2018.

Its also important to note that while Bitcoin has been volatile this year with a few 20% peak to trough declines, the digital currency is now about to make a new all-time high, placing its ytd gains at 677%, sporting a market cap of $128 billion, equal to that of NVDA!

At this point, I would be shocked if this stock does not tick the nice round number of $50, but I would not buy it here with my worst Twitter troll’s money…

Here was the trades we detailed for those who shared this view and were looking to express a bullish stance at then all-time highs up 200% plus with defined risk, first outright bullish:

-Buy to open 1 Dec 29th 42 call for 2.25

-Sell to open 1 Dec 29th 50 call at 25 cents


We updated this trade the day after and said this:

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 with the stock at $47.50 the original call spread is worth about $4.50. It’s max gain can only be $8. Intrinsically it’s worth about 5.50 here so some of the profits are yet to come in. But it’s more than a double in just a few trading days and that means it now likely warrants a roll up and out, using some of the profits. At some point in a vertical spread that moves quickly to the short strike, as a trader you have to weigh how much you are risking with the recent gains vs how much time you have left and the probability of realizing the full width of the spread.

And now the Call Calendar that played for near-term consolidation and a breakout in the new year:

-Sell to open 1 Dec 45 call at 70 cents

-Buy to open 1 Jan 45 call for 1.60

Here’s what we said on Friday’s update when the stock was nearing the 45 strike:

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.

The scenario where the stock exploded through the 45 strike happened today. While the stock now well through the strike, this trade is a small winner, and trade management is important (and keeping to the stop). As this trade is now short deltas, which isn’t the view being expressed. This is a great example where you can get the direction right but the trade structure wrong. At this point, if the stock were to continue higher, the trade would go from a small winner to a loser. It might makes sense to cut and run on this one and be happy that it is not a loser, sadly.