Hereâ€™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.
Itâ€™s a virtuous cycle that continues to pay believers while steamrolling any bears bold enough to fight the tape.
Today weâ€™re chronicling the stockâ€™s ascension and discussing why I think bull call spreads are the best bet if youâ€™re looking for a low-cost trade to capitalize on continued strength into 2021. Though the uptrendâ€™s pace will likely slow, betting with buyers is still the smart way to go.
Square Stock Chart
Thus, Iâ€™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 stockâ€™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 itâ€™s high, short premium strategies like bull puts are attractive. When itâ€™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, weâ€™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.
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