Don’t be a square — play it smart in Square (NYSE:SQ) using a well-placed put vertical combination. If today’s profit-taking turns into something a bit healthier, that’s as good as money in the bank for today’s SQ stock bullish spread trader. Let me explain.
Much like any stock in the market — but maybe particularly so with a momentum name like Square stock — there’s going to be a fierce competition between bulls and bears. And to kick off this trading week, it was the bears’ turn to take a swing.
Shares of SQ plummeted more than 8% Monday following the latest warning from a steadfast bear pointing fingers at Square’s new consumer lending business. The bear in question, BTIG’s Mark Palmer, argued the move “adds to Square’s overlooked credit risk” and the company’s increased vulnerability to credit market volatility in a downturn.
While it didn’t make nearly as big an impact on Square stock investors, Buckingham Research chimed in during the session with its own more upbeat view. The firm sees SQ’s consumer lending business as supporting their bull thesis of the company’s high-margin services offerings continuing to drive substantial growth.
So, who are investors to believe? Maybe it’s time to simply look at the Square stock price chart and appreciate that history does rhyme on occasion.
Square Stock Weekly Chart
It has been very hip to be a Square stock investor the past few months. Since penning a supportive piece in late May, shares rallied nearly 100% to bring SQ’s year-to-date performance to almost 200%. But those type of gains do come with a warning label; namely corrections.
Corrections are part and parcel for all stocks, but this is especially true of growth names like Square when momentum extends shares technically well beyond their last larger pattern consolidation.
Square stock’s last meaningful formation of this kind was a base-on-base cup which immediately preceded SQ’s more linear enthusiasm of the past few months. As much, today’s profit-taking may rightfully lead to slightly more pressured and healthier declines in Square in the days and weeks ahead.
Square Stock Put Vertical Spread
Given our view Square stock is in the process of putting together a larger but fairly common correction such as early 2018’s 31% base reset, I like the idea of positioning with an out-of-the-money put vertical spread.
Reviewing Square stock’s options for bullish ideas, one such favored combination is selling the Nov $75/$70 put vertical. The spread is priced for a $1 credit with shares off modestly at $85.90 during Tuesday’s first half.
If we’re wrong about the size of Square’s correction or we’re off the mark altogether and SQ begins to climb higher from here, the trader will keep the spread’s credit of $1. Not bad, right?
On the other hand, if we’re correct and shares continue lower, this combination allows one to pick where they’d be comfortable buying SQ below the market. In this instance the worst-case purchase price is $74. I like this spot as a starting point to accumulate shares, as it allows for a larger but normal correction of 25% to 26% to play out before buying Square stock.
Lastly, because the spread limits the trader’s exposure, the initial purchase could be even cheaper than the $74 entry price. Bottom line, if SQ stock drops below the vertical during the life of the position, a $4 loss on paper could become an added bonus for buying into Square on extreme weakness.
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.
