Square Inc (NYSE:SQ) has been forging a more or less straight line higher over the last couple weeks. But with earnings on tap, if you’re a believer that the trend can continue, appreciating a volatile history while also respecting the underlying risk associated with Square stock means a well-positioned long butterfly is an option to consider. Let me explain.
Tuesday night, Square stock is set to release its fourth-quarter results. Analysts expect the banking upstart to swing into profitability on earnings of 7 cents per share compared to last year’s loss of 4 cents. Enviable sales growth of 33% is forecast on revenues of just more than $600 million.
The fiscal year prospects look equally bright, with forecasts calling for sales growth of 29% on revenue of $2.84 billion. But not everyone is a believer in SQ in front of Tuesday’s confessional.
One skeptic in a split community of analysts is BTIG’s Mark Palmer. In a note to clients he warned of Square’s risky price multiple and “live-with-it, die-with-it” connection with the cryptocurrency market and in particular, with bitcoin. He’s not alone, as SQ stock does sport bearish short interest of around 16%.
On the other hand — maybe the one holding the mobile card swiper — not everyone is bearish on Square stock. Earlier this month, Deutsche Bank pointed to the company’s revenue momentum, high-profile growth and massive market opportunity as continued support behind its buy recommendation.
More recently, KeyBanc Capital Markets anticipates Square will easily top Q4 consensus views when it reports and offer “conservative, yet beatable guidance.” And even financial rag Investor’s Business Daily is turning a blind eye and embracing a faulty cup-with-handle pattern as one to put on the radar.
Square Stock Daily Chart
Personally, I don’t find fault with imperfect price patterns. It’s par for the course in today’s fiercely competitive and algorithmic-driven markets. But for the purists and as noted above, Square stock technically fails as a textbook example of a bullish cup-with-handle.
Bottom line, with its handle depth falling below the larger cup base’s 50% retracement level, it is what it is, but it’s not a handle. I’m more inclined to believe it’s — and in fact, recently labeled SQ’s price action as — an emerging uptrend within a decent corrective base of 31% depth.
No matter what you believe technically, Square stock does have a short but consistent history of making larger price moves in its earnings aftermath. Over the past year shares have witnessed an average move of 7.75% over the following 7-day period. Our opinion is that’s certainly worth respecting when accepting position risk.
Square Stock Moderately Bullish Butterfly Spread
Reviewing Square stock’s options for bullish ideas and respectful of history rhyming in shares, I’m favoring the long March $48/$51/$54 call butterfly. With shares of SQ at $46.55, the combination is priced for 45 cents or just under 1% of the risk associated with holding long stock.
The real cost to be considered with the low entry price is that this spread is moderately bullish over a trading range. If a post-earnings reaction is too large and Square stock is above the $54 call strike at expiration, the full debit will be lost.
The good news is this spread maintains a profitable zone in between $48.45 to $54.55 and offers a potential payout as high as $2.55 if SQ finishes at $51 on expiration next Friday. This allows for a 9.55% move in shares, which aligns itself pretty well with prior post earnings reactions.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
