Square Inc (NYSE:SQ) came into its earnings event on Wednesday down 60% from its highs. But that still left SQ stock up over 140% in 12 months. Even after this negative reaction on the earnings headlines, SQ stock is still up over 130% from last May.
SQ is a successful up-and-coming transactor. We are in the age where most financial transactions are already electronic, so Square is in the right place and at the right time.
The short-term reactions to earnings are always coin flips regardless of the quality of the report. In this case, management delivered an in-line earnings and a revenue beat. This is important since for growth companies like SQ, the top line matters more than the bottom.
They also raised guidance which is perhaps the most important step that investors these days need to see. However, management this time did not update the Street on their user metrics and perhaps that raised some concerns.
SQ also addressed citron’s complaints about bitcoin as a hoax. The message was basically that their involvement in bitcoin is still on the menu and perhaps expanding into the future.
The consensus is that the world needs blockchain technology going forward, and bitcoin is a big part of it for now. SQ wants to be in the right place but ahead of its time.
Fundamentally, Square stock is definitely bloated in versus its peers. It is an expensive stock when you consider I can buy Visa Inc (NYSE:V) or Mastercard Inc (NYSE:MA) for comparative bargains.
Heck even Paypal Holdings Inc (NASDAQ:PYPL), which is not cheap, would be a bargain after yesterday’s drubbing.
Technically, the price action in Square is still attractive from the long side. Even after the earnings drop, it’s still holding above a pivotal level around $45. That zone was resistance until it served as a major breakout this past March.
So, in this case, I can still assume that prior resistance is still holding as forward support. The bulls can rebuild their efforts, especially if the markets in general shrug off this headline malaise that is holding the fundamentals hostage right now.
Trading SQ Stock
To go along, I can either risk $47 per share with no room for error, or use Square options to create a moat around my risk.
Today, instead of chasing upside momentum I am betting on downside support through 2018. This is a momentum stock so I consider this an aggressive speculative trade but as part of a conservative portfolio. If price moves against me, I will own Square shares but at a much lower price than current. There is technical risk — if the $45 level fails then the $41 level is in trouble.
The Bet: Sell SQ Sept $33 put for $1. This is a bullish trade which does not require a rally to profit. Here I have a 75% theoretical chance of success. But I would accrue losses below $32.
Selling naked puts carries big risk especially for a stock as expensive and as volatile as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell SQ Sept 34/$32 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade requires a rally to profit.
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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 as @racernic on twitter and stocktwits.
