Square Inc (NYSE:SQ) has a lot going for it off and on the price chart. But if you’re going to get long SQ stock, think outside the box and get long a well-placed, moderately bullish long call butterfly. Let me explain.
Shares of Square took a modest 3.1% hit Tuesday as investors reacted cautiously to news of a $750 million convertible offering. The financing will be used by the company grow its business through its existing acquisition strategy and maintain market share against competition from the likes of PayPal Holdings Inc (NASDAQ:PYPL).
Whether the plan continues to work for SQ stock remains to be seen without the luxury of hindsight. But as investors also have a talent for backtracking on an initial reaction to mixed information, I say don’t be square. Bottom, top and as the squiggly lines on our price chart show, SQ stock still has a lot going for it these days.
SQ Stock Weekly Chart
SQ stock has enjoyed a solid return for its shareholders since going public in 2016. And based on what we’re seeing today, shares aren’t finished moving higher.
It’s true, shares of Square have become a good deal more volatile over the past several months. That’s easy enough to see on the provided weekly chart. Nevertheless, following a capitulation in late 2017, SQ stock has continued to make the right moves. A fairly common correction of 31% has morphed into a cup-shaped base-on-base pattern and that bodes well for bullish investors.
SQ Options: Moderately Bullish Butterfly Spread
Reviewing Square stock’s options for bullish ideas, I’m once again favoring a bullishly positioned long butterfly. One such opportunity which looks attractive is the July $60/$65/$70 call combination.
With shares of SQ at $54.63 the butterfly is priced for 52 cents or just under 1% of the risk associated with holding long stock. For bullish investors the butterfly offers a wide profit zone from $60.52 up to $69.48. And if SQ lands on $65 at expiration the strategy’s maximum return of $4.48 would be secured. So far, so good, right? But, there are costs to consider.
First, the break-even is about 10% above the current price. Thus, if SQ fails to rally meaningfully and into this price area, the small debit will be lost. Secondly, Square also lacks an official catalyst such as earnings, which might otherwise launch investors into action. That could beg the question, why bother?
This spread was chosen over pricier strategies as a technical breakout to new highs is fully-capable of drawing in fresh buyers in its own right. Should that occur, and I do believe it will, that price action should easily chip away at and right through the strategy’s breakeven.
Lastly, I’d be remiss without mentioning a third risk with this butterfly. If SQ stock rallies too strongly and above the $70 strike call, at expiration the debit would also be lost. Bottom line, that’s a compromise on paper, but less of an issue for traders willing to think and work outside the box with acceptable risk.
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.
