SQ Stock: Earnings Option Trade Idea
Square (SQ) stock reports earnings this week on Tuesday after the close.
SQ is currently above the 21-day, 50-day and 200-day moving averages and showing nice accumulation. With a Composite Rating of 97, and EPS Rating of 88 and an RS Rating of 92, SQ stock is highly rated.
Traders that expect a positive earnings result could look at a bull put spread expiring later this week.
A bull put spread is a defined risk option strategy that profits if the stock closes above the short strike at expiration. To execute a bull put spread an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.
Traders who think SQ stock will rally or at least not drop by too much could look to sell a Feb. 26 260 put and buy a Feb.y 26 255 put.
Bullish SQ Stock Option Trade
As of Friday, this spread was trading for around $1.30. This means a trader selling this spread would receive $130 in option premium and would have a maximum risk of $370.
That represents a potential 35.14% return on risk in five days as long as SQ stock remains above 260. If SQ stock closes below 255 on the expiration date the trade loses the full $370.
With this being such a short-term trade, there is no chance to adjust the trade if it goes bad. Trading options over earnings can be risky, so keeping position size small is a good idea.
SQ earnings are set for Thursday after the close with the consensus for a gain of $0.24 per share on revenue of $3.10 billion.
The options market is pricing in a 9.20% move in the stock in either direction. Implied volatility is elevated at 62.4%, which puts it in the 58th percentile of all readings in the last 12 months.
It’s important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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