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Tue, December 10 at 7:00PM ET

Square Looks Ready to Break out After Earnings

Even if it drops, it's set up to grow

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This morning, I’m recommending a bullish trade on Square, Inc. (NYSE:SQ).

SQ reports earnings tomorrow, after the market closes. This stock is up by over 45% since the start of 2019, and though it is coming up against resistance, a good earnings report could push it even higher.

Even if there is a negative reaction, SQ has proven it can recover after an earnings related selloff. That makes this a compelling stock to take a longer-term options trade on.

New Office Space

According to the St. Louis Post-Dispatch, SQ recently signed a lease for a much larger office space. The company currently employs around 500 people in St. Louis, and the new office space will support its plans to expand that number to 700.

SQ has been planning this expansion since 2018, and it is a sign that the company continues to grow. Hiring more employees would allow SQ to expand its already substantial offerings. Even if the company did post a loss this quarter, I’m confident it can recover and continue its bullish run higher.

Outperforming the Market

The S&P 500 has pushed up to new highs, and now it is up by nearly 22% from the start of the year. But SQ is doing even better, in a sense. While SQ hasn’t gotten up to its all-time high from 2018, it has gained over 45% since the start of 2019.

Daily Chart of Square, Inc. (SQ) — Chart Source: TradingView

As you can see in the chart above, SQ is hovering around resistance at the $83 level. After getting rejected at this level in March — possibly due to profit taking after earnings — the stock dropped down to support at around $70.

After reporting earnings in May, the stock dropped down to $60 before turning around.

This time, SQ has been rejected at the $83 level before earnings, and it found some support at around $78. Investors may have tempered their expectations, not wanting to push SQ’s price above resistance before getting a clearer idea about the company’s recent performance.

Because SQ is expanding its workforce in St. Louis, I think it is set up for more growth over 2019, even if its second quarter earnings disappoint. By setting an expiration later in the year, we can be ready to take profits on a strong report, or we can hold the trade and take profits as SQ continues to rise.

I’m recommending a bullish call debit spread to reduce the cost (and risk) of a bullish position on SQ.

Using a spread order, buy to open the SQ Dec. 20th $95 call and sell to open the SQ Dec. 20th $100 call for a net debit of about $1.00.

Note: Be sure you are opening the monthly SQ options that expire on Friday, Dec. 20, 2019.

About Debit Spreads

A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.

Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.

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