Here’s a mind-blowing stat for you: Square (NYSE:SQ) is up nearly 600% since March. Incredible? Definitely. Unsustainable? You bet. But so far, any attempts to pick a top have been exercises of futility. Square stock is a quintessential case of a trend in motion staying in motion.
It’s a virtuous cycle that continues to pay believers while steamrolling any bears bold enough to fight the tape.
Today we’re chronicling the stock’s ascension and discussing why I think bull call spreads are the best bet if you’re looking for a low-cost trade to capitalize on continued strength into 2021. Though the uptrend’s pace will likely slow, betting with buyers is still the smart way to go.
Square Stock Chart
Click to Enlarge
Thus, I’m left to conclude that the path of least resistance remains higher. The only remaining question, then, is whether you want to enter now or wait to see if a pullback develops?
The past three days sport doji candles, reflecting indecision in Square stock. I prefer to have the stock take out the high ($222.20) to confirm a new up-leg is beginning before entering new long trades.
Bull Calls at This Point
The options market offers an array of strategies to capitalize on price appreciation. I have a few simple rules that help me determine the optimal strategy for each situation. Square stock’s price is over $200, making it far more attractive for a spread trade than buying options outright. That will help us contain the cost while enhancing the leverage. Deciding between buying a spread and selling one comes down to whether options are cheap or expensive.
For that, we can look to implied volatility. When it’s high, short premium strategies like bull puts are attractive. When it’s low, long premium plays like bull calls become tempting. The current implied volatility rank for Square is 23%, putting it in the lower quartile of the one-year range.
A final consideration pointing toward bull calls would be to create a more directional trade with more profit potential. Bull calls offer more upside than bull puts. To give Square stock plenty of time to climb in value, we’ll use March options.
The Trade: Buy the Mar $220/$240 bull call spread for $7.60.
The maximum loss is $7.60, and the maximum gain is $12.40.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
For a free trial to the best trading community on the planet and Tyler’s current home, click here!
