Square Inc (NYSE:SQ) stock is up 175% in the past 12 months. So is it too late to go long it? No.
2017 has been a good year for financial stocks in general. Banks have recently told us that they are flush with cash and they intend on using it to support their stocks. The transactors like Visa Inc (NYSE:V), Mastercard Inc (NYSE:MA) and Square usually move in sympathy, so they too will benefit from this financial engineering.
Click to Enlarge SQ stock has so far outperformed the sector by far. It even eclipses the hot stock of Paypal Holdings Inc (NASDAQ:PYPL). The problem with momentum stocks this hot is that they don’t leave obvious entry points. They perpetually seem ready to correct.
But in this case, the fundamentals do support the trajectory. To go long Square stock here I’d prefer to mitigate my risk by leaving room for error. So I am not going to buy the stock at all-time highs and this late in the rally.
SQ Stock Trade Idea
The Trade: Sell the SQ Dec $19 put and collect $1 to open. This trade has only a 75% theoretical odds of delivering maximum gains. If price falls below my strike then I must own the shares and accrue losses below $18. This wouldn’t be the end of the world, since I would be buying the shares at a 25% discount from today.
If I want to simply create income without committing to owning the shares, I can sell a bull put spread instead. There, the maximum risk is finite so I am not exposed to as much downside.
The Alternate Bet: Sell SQ $19/$17 bull put spread where I have about the same theoretical odds of success but with less margin requirement. Yet if the spread wins it delivers 22% in yield.
Selling downside premium works well for stocks that are on a parabolic trajectory. Case in point is this trade I shared in February that delivered a huge win with zero out-of-pocket expense.
Key to implement this strategy is that I want to own the shares but at a lower price. Because if price falls below my strike then I must own the shares.
The alternative would be to risk $25.5o buying the stock at face value and, without any buffer, expect a sizable rally. This is risky at all-time-highs.
Investing is risky, so I never expose my portfolio to trades that can break my piggy bank.
Learn how to generate income from options here. 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.
