Square Inc (NYSE:SQ) is due for a correction. It’s not that I don’t like Square, I think the company has considerable upside ahead of it as a market leader as a mobile payment processor. The recent rise in SQ stock is untenable, however, and its bitcoin hype is only making things worse.

Click to Enlarge The biggest reason to short, or buy puts, on SQ stock comes from the shares’ technical backdrop. SQ has rallied more than 220% so far this year — impressive gains indeed. Square’s recent bump higher due to bitcoin speculation has gotten out of hand, however.

SQ stock is now trading firmly in overbought territory, with its 14-day RSI hovering just shy of 90. A reading of 70 is typically considered overbought. And the SQ stock price has traded overbought since the beginning of October.

In short, there are few buyers left to push SQ stock higher, while those speculative short-term buyers are going to be looking to take profits soon.

The second biggest reason to be at least short-term bearish on SQ stock comes from the analyst community. According to Thomson/First Call, 16 of the 25 analysts following SQ rate the shares a “buy” or better, with a 12-month consensus price target of $38.29.

While price-target cuts are not a concern, downgrades due to valuation are a real possibility considering Square’s recent bitcoin bump.

It’s not that analysts don’t like SQ stock, it’s that the shares are currently trading 100 times expected 2020 earnings, which could elicit a valuation downgrade or two.

Turning to Square’s options outlook, we find less bullishness than you would expect. Currently, the December put/call open interest ratio rests at 0.76. While calls clearly outnumber puts among front-month options, there are clearly those looking for a pullback in SQ stock.

As for December implieds, options traders are currently pricing in a move of about 9.6% for SQ stock heading into expiration. This puts the upper bound near $49 and the lower bound near $40.

2 Trades for SQ Stock

Bear Put Spread: With SQ stock trading deeply overbought, traders looking to profit from a pullback might want to consider a Dec $41/$43 bear put spread. At last check, this spread was offered at 67 cents, or $67 per pair of contracts. Breakeven lies at $42.33, while a maximum profit of $1.33, or $133 per pair of contracts — a potential 98% return — is possible if SQ stock closes at or below $41 when December options expire.

Call Spread: Since the market can remain irrational longer than you can remain solvent, there is also the possibility that SQ stock has a bit more upside before this breakneck rally abates. Traders looking to take advantage of this irrational exuberance might consider a Dec $46/$47 bull call spread has potential.

At last check, this spread was offered at 23 cents, or $23 per pair of contracts. Breakeven lies at $46.23, while a maximum profit of 77 cents, or $77 per pair of contracts — a potential return of about 230% — is possible if SQ stock closes at or above $47 when December options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.