Short Interest, Options Volume Peaks on Square Stock Before Earnings

A short-squeeze situation could be in store for Square

Nov 7, 2017 at 2:36 PM
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Square Inc (NYSE:SQ) is scheduled to report earnings after the market closes on Wednesday, and options volume has been unusually heavy heading into the event. In fact, put and call open interest currently sit at 52-week highs, with traders on both sides of the aisle placing bets before the release. Below, we'll take a closer look at recent options activity on SQ stock, and how the shares have been performing before earnings.

First of all, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) reveals call buying has remained very popular, based on the equity's 10-day call/put volume ratio of 5.87. This means almost six long calls have been purchased for every put.

The call that saw the largest increase in open interest during this time frame was the front-month November 40 call, and data from the major options exchanges confirms buy-to-open activity here. As such, these bulls are expecting SQ stock to break out above the round $40 mark, which would mark record highs for the security.

However, it was the November 35 put that saw the largest increase in open interest during the past two weeks, and buy-to-open action is confirmed here. On the other hand, the November 34 saw a notable increase in open interest, as well, but data suggests traders were selling to open these puts, expecting Square stock to hold above the strike through the close on Friday, Nov. 17, when the options series expires.

As would be expected ahead of earnings, near-term volatility expectations are very elevated for the equity. This is evidenced by its Schaeffer's Volatility Index (SVI) of 75% -- an annual high. Still, SQ has shown a tendency to make bigger-than-expected moves over the past year, compared to what options traders have priced in, since its Schaeffer's Volatility Scorecard (SVS) stands at 82.

Meanwhile, short interest has steadily risen on the stock, including a huge 40.5% jump in the last two reporting periods. Short interest on Square is now at a record high, with 8.6% of its float controlled by these bears, accounting for more than a week's worth of buying power, based on average daily volumes.

There's also still plenty of skepticism from analysts. Currently, 12 of 28 brokerage firms still carry "hold" ratings on SQ, and the average 12-month price target of $31.33 is below current trading levels.

All this comes despite the stock's rapid rise on the charts during the past year. At last check, the shares were trading at $36.91, giving them a year-over-year lead of more than 200%. Just yesterday, the equity hit a record high of $37.75. And its post-earnings history has been mostly positive, moving higher in the session after reports in four of the past five quarters. Another strong showing in the earnings booth could result in short-covering or bullish analyst attention, suggesting more upside is possible for Square.


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