Square Inc (NYSE:SQ) stock, unlike that of Twitter Inc (NYSE:TWTR), is flying high. One can argue that Jack Dorsey is spending more time running SQ and not enough time tending to the struggling Twitter.
Both companies reported earnings recently, with TWTR falling 12% or so whereas SQ stock spiked 14% on the news.
I rarely chase spikes of this size, but in relation to its initial offering, SQ stock could be headed much higher in the long term. The company seems to be doing all the right things to keep Wall Street interested in owning its stock.
Fundamentally, Square has formidable competitors, but I think they managed to carve a great niche. Yes, they have to battle giants like Paypal Holdings Inc (NASDAQ:PYPL), but to me they don’t seem like comparable in my portfolio.
Before you call me stupid for uttering those words, I am only interested in the stock price perspective. I see Square stock as a faster runner with more momentum aback the “hopium” of exciting innovation that is yet to come. I use PayPal often and have never used Square … but perception is all that matters for price action.
The Bet: Buy the SQ Jun $18/$19 debit call spread. This is a bullish trade that costs 35 cents per contract to open. If SQ stock rallies past my spread by mid-June, then I stand to double my money. There are hundreds of other ways I can use options to accomplish this.
Usually I like to hedge my bets. In this case, I will sell downside risk to negate my out-of-pocket expense into my long trade.
The Bank: Sell the SQ Jan 2018 $12 put. I collect 70 cents per contract to open. The buffer from current price gives me an 85% theoretical chance of success.
Selling naked puts is risky because I am committing to buying the stock at my sold strike if SQ stock falls below it. So my thesis better hold up or I could be exposed to losses below $11.30 per share. Conversely, if SQ stock stays above my sold puts, any premium I capture from selling my long call position is pure profit. So I don’t really need SQ to rally much to profit.
I am not required to hold the any options trades through expiration. I can close my positions at any time for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.