Square (SQ) Q3 Earnings Preview / Trade Ideas

by Dan November 6, 2019 8:50 am • Trade Ideas

Square (SQ) will report its Q3 results today after the close. The options market is implying about a 9% move in either direction which is rich to the 8% average one-day post-earnings move over the last four quarters. With the stock just at $61, the Nov 8th weekly 61 straddle (the call premium + the put premium) is offered at about $5.40, if you bought that, and thus the implied move between now and the close tomorrow, you would need a rally above $66.40 or a decline below $55.60 to make money.

Shares of Square are up only 85% on the year, after its 28% decline since its Q2 earnings in August which happened to have come from a 52 week high. In hindsight the recent high was a massive double top, while the stock has found some support near the $2019 lows in the mid $50s:

Taking a view from its 2015 IPO, the stock appears to be at an important technical spot having worked itself into a tight wedge that suggests the stock could break hard one way or the other… given the way we have seen some high valuation, high growth stocks trade of late, I would not be optimistic about a sharp move to the upside as mild beats have not been met with too much enthusiasm but misses are causing  serious hate selling (see MTCH this am).


Wall Street analysts remain fairly mixed on the stock with 18 Buy ratings, 18 Holds and 3 Sells, their trepidation largely rests on valuation, with the stock trading about 80x 2019 expected adjusted eps of 77 cents, and 11.4x expected 2019 sales of $2.29 billion, growing at 44% year over year. On a GAAP basis, eps swings to a small loss equivalent to a $24 million loss in net income.

SO what’s the trade?

If you are inclined to think that decelerating revenue and margin growth could weigh on investor sentiment, and a third consecutive guidance downgrade could cause the stock to re-test support in the mid $50s then consider short-dated put spreads, for instance…

Bearish Trade Idea: SQ ($61.06) Buy Nov 60 – 55 put spread for $1.50

-Buy to open 1 Nov 15th 60 put for 2.35

-Sell to open 1 Nov 15th 55 put at 85 cents

Break-even on Nov 15 expiration:

Profits of up to 3.50 between 58.50 and 55 with max gain of 3.50 at 55 or lower.

Loses of up to 1.50 between 58.50 and 60 with max loss of 1.50 above 60

Rationale: this trade idea risks 2.5% of the stock price with a break-even down 4% with a max profit potential of 5% if the stock is down 10% in 7 trading days. The options market is saying there is about a 35% chance this trade is break-even on Nov 15th expiration and about 18% chance that it is at max profit at 55.


If you think the company can buck the trend of downside guidance and issue a beat and raise and cause a sustained short squeeze then consider call spreads in Dec that target a gap fill back towards $80:

Bullish Trade Idea: SQ ($61.06) Buy Dec 65 – 75 call spread for $1.80

-Buy to open 1 Dec 65 call for 2.40

-Sell to open 1 Dec 75 call at 65 cents

Break-even on Dec expiration:

Profits of up to 8.20 between 66.80 and 75 with max gain of 8.20 above 75

Losses of up to 1.80 between 65 and 66.80 with max loss of 1.80 at 65 or lower.

Rationale: an out of the money call spread like this that breaks-even up 9.5% with a max payout up  23% would only make sense for someone who is very convicted on the stock moving sharply higher, also possibly looking to add leverage to an existing long position, but with defined risk.

The options market is suggesting there is about a 35% chance this trade is break-even on Dec expiration, and only about a 13% chance it is $75.


***I’ll offer our normal disclaimer on long premium directional trades into events like earnings… you need to get a lot of things right to merely break-even, direction first and foremost, the magnitude of the move and of course timing. Buying at the money weekly options into events like earnings can be very Binary and should be used for those with high conviction when one is looking to define their risk, or hedge a long or short position, or possibly add leverage but be cognizant of risking what you are willing to lose.