Square (SQ) continues to be one of the highest-rated stocks in the market. Square stock also currently sits in IBD Leaderboard.
Square stock has impressive IBD ratings, with a highest-possible Composite Rating of 99, an EPS Rating of 95 and a Relative Strength Rating of 92. It is also the top-ranked stock in IBD’s credit card and payment processing industry group.
Back in March, we looked at a bull put spread, and traders who were able to hold through the late-March drop would have done well.
Traders wanting to take a similar exposure out to May in Square stock could look at a new bull put spread for the May 21 expiration.
As a reminder, a bull put spread involves selling an out-of-the-money put and then buying a further out-of-the-money put.
Bullish Option Trade
With the 21-day moving average around 232, a bull put spread could be placed with the short put at 230 and the long put at 220.
On Friday, this spread was trading for around $2. I would look to sell this for $2.50 if Square stock drops slightly this week. That means a trader selling this spread would receive $250 in option premium and would have a maximum risk of $750.
That represents a 33% return on risk between now and May 21, as long as Square stock remains above 230.
If Square stock closes below 220 on the expiration date, the trade loses the full $750. I would set a price alert if the stock drops below 230. At that point, I would either close the trade, adjust or hedge.
The break-even point for the bull put spread is 227.50, which is calculated as 230 less the 2.50 option premium per contract.
This bull put spread trade has a delta of 6, which means it is a similar exposure to owning 6 shares of Square. Keep in mind, this exposure will change over time as the stock price moves.
Earnings Risk For Square Stock
Square’s earnings are due May 6, so this trade would have earnings risk.
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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