It’s Hip to Bet on Square (SQ)

Square (SQ) is considered one of the most innovative companies in the payment processing space. That said, the stock has done what most tech stocks have done so far in 2021 … gone nowhere. In fact, the shares are up less than a percent this year. Moreover, SQ has been in a trading range between 200 and 280 for most of the past seven months.

Despite the sluggish overall performance, we are keying on the support of the 200-day moving average, a trendline that currently sits just above 210. Other than a handful of daily closes below it in May, the stock has respected the support of the 200-day, most notably during the past week. Moreover, we’re using a bullish credit spread, which does not require the stock to go up. Rather, all we care about is that the short put remains out of the money. That’s why we’re banking on the support of the 200-day (blue line), as our short put is at the 210 strike (red line).

If you agree that SQ will stay above its 200-day moving average, consider the following trade that relies on the stock remaining above 210 through expiration in six weeks.

Buy to Open SQ 23Jul 205 put (SQ210723P205)
Sell to Open SQ 23Jul 210 put (SQ210723P210) for a credit of $1.80 (selling a vertical)

This credit is $0.02 less than the mid-point of the option spread when SQ was trading above $219. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $178.70. This trade reduces your buying power by $500 and makes your net investment $321.30 ($500 – $178.70).  If SQ closes above $210 on July 23, both options will expire worthless and your return on the spread would be 56% ($178.70 / $321.30).