While the stock markets have been pressured downward by threats of global tariff wars, the financial technology sector has been relentless. Stocks like Square (NYSE:SQ), Paypal (NASDAQ:PYPL) and even old dogs like Visa (NYSE:V) or Mastercard (NYSE:MA) are soaring to outperform the S&P 500. But Square stock reigns supreme from that perspective with a rise of 140% year-to-date. Compare that to 30% for Visa and 40% for MasterCard, while the SPY is at 7% for the same period.
The attraction to financial tech, as it’s called, is that our societies have transitioned into an electronic transaction environment. Evidence of it is the fascination with bitcoin and Blockchain. From a simple perspective of retail sales, the trend is definitely to online versus in-store. So the transactions are mostly electronic and that plays right into the hands of companies like Square.
Fundamentally, SQ stock is not cheap. The SQ stock price is on a meteoric rise while it still has to turn a profit. But consensus is that the company is well positioned to have a fantastic future, even with blockchain. While I don’t disagree with that, I do think that it could have some short-term price pressures.
So before you send your hate mail, this is not a knock on the company itself, as I have shared bullish SQ trades on several occasions. This is merely a bet against the recent price action and to balance a mostly conservative bullish portfolio.
How to Trade Square Stock
Technically, Square stock tends to rise fast into sharp wedges then retreat to consolidate before it finds footing to set a another leg higher. So at this point, I think that there might be some downside before the next leg higher. And therein lies the opportunity.
No, I will not sell SQ stock short outright because that would cause me to face the potential of unlimited losses. Instead, I use options to buy puts into that consolidation level.
To further lower my out-of-pocket expense, I will use the company’s perceived value to generate income to pay for those puts. Since I already believed in the concept of financial tech companies, I am merely using that value to generate income. The second part of this pair trade is to sell downside risk into support levels toward the end of the year.
There is risk at these levels, as we are still in “headline mode” and awaiting the next tranche of Chinese tariffs to hit today or tomorrow. So this would double as a hedge to my bush portfolio. I think it’s important to keep balance with risk so not to be all positive all the time regardless of potential pitfalls.
The bearish bet: Buy the SQ Dec $80/$75 debit put spread for $1.25. This is a bearish trade that profits from a dip in prices. It offers a chance to triple the bet.
To lower the out-of-pocket risk, I sell downside risk into lower levels that should hold as support for months.
The bullish bank: Sell the SQ March 2019 $60 put. This is a bullish trade, where I collect $1.50. If prices falls below it, then I own the shares at that price.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters.
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.
