Update: Square (SQ) Rolling Up

by Dan February 18, 2020 12:02 pm • Trade Updates

On January 8th when shares of Square (SQ) were trading near $67 I detailed two defined risk bullish strategies to play for a restest of the 2019 highs (I Have Two Squares to Spare) targeting two events that could change the bearish sentiment, first the company’s earnings on Feb 26th and then their March 18th analyst day. Well it didn’t take the catalysts to get the stock back to its 2019 highs, the stock is up 31% on the year so far, and back at technical resistance:

It makes sense to take a look back at the two bullish trade ideas…

First the call calendar:

If I were inclined to play for an eventual breakout of $70 and straight shot towards $80 after earnings and analyst day I might consider a call calendar, selling a short-dated out of the money call to help finance the purchase of a longer-dated one that catches the catalysts, earnings in late Feb and then the analyst day. in mid-March, for instance:

-Sell to open 1 Jan 70 call at 70 cents

-Buy to open 1 March 70 call for $3.70

The short call strike in Jan expired worthless on Jan 17th as the stock closed on expiration at $69.38. Leaving the trade long the March 70 call that was worth $4 on the close Jan 17, or a $1 profit.

Now with the stock at $82.25, the March 70 call is worth $13. It makes sense to take the profit, and if still bullish roll the view up and/or out a bit. At this point the trade is too in the money, risking too much premium.


The other bullish trade idea was a vertical call spread:

If you think that a call calendar is trying to thread the needle and interested in just making a sort of set it and forget trade to play for new highs in March, then consider call spreads to define your risk… for instance:

-Buy to open 1 March 70 call for $3.70

-Sell to open 1 March 85 call at 70 cents

With the stock at $82.25 the March 70 – 85 call spread is worth about $9.50, or a $6.50 profit. In this case with earnings and analyst day yet to come it also makes sense to roll a bullish view up and/or out. When considering strikes, lets look at the long term chart to get a sense where we should target. On three occasions since late 2018 the stock has failed massively at $82.50, if it can get through this time it might be a straight shot to the prior all-time highs near $100:


So what’s the new trade? If I were inclined to play for a beat and raise next week, and then incremental good news at the SQ analyst day in mid-March I might consider using the gains of the earlier trade ideas to buy a new call spread in March:

Bullish Trade Idea: SQ ($82.25) Buy March 85 – 100 call spread for $3

-Buy to open 1 March 85 call for $3.65

-Sell to open 1 March 100 call at 65 cents

Break-even on March expiration:

Profits of up to 12 between 88 and 100 with max gain of 12 above 100

Losses of up to 3 between 85 and 88 with max loss of 3 below 85

Rationale: this trade idea risks 3.6% of the stock price and offers a potential payout of 15% if the stock is up 21% in a little more than a month. The options market is suggesting there is about a 34% chance this trade idea is break-even on March expiration and about an 11% chance the trade idea is at 100, or its fill value on March expiration.