Square Stock Spike Results in Heavy Call Buying

Shares of payments processor Square Inc (NYSE:SQ) are rallying today despite the absence of any specific news. At last check, Square stock was up 5% at $25.19, which puts it on pace for an all-time closing high; the shares' record intraday peak is $24.97, touched back on June 9. Year-to-date, SQ stock has added over 83%, and today's options trading activity suggests many investors expect more upside. 

SQ Call Volume Accelerated

So far today, Square call options are trading at six times the expected intraday pace, putting volume on pace to end in the 99th annual percentile. By the numbers, roughly 9,400 calls have traded, compared to fewer than 900 puts. Much of the activity has centered around the December 23 call, where data points to buy-to-open activity. If this is indeed the case, options traders are betting on SQ stock extending its lead above $23 through December options expiration. 

The August 25 call is also popular today, and likely seeing buy-to-open action, as well. In the front-month July series, which expires at the close on Friday, July 21, the 24 and 25 calls are seeing the most volume. And on the put side, the July 24 contract leads the way, but traders could be betting on a short-term floor by selling to open the option. 

Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) reveals call buying has been the more popular strategy over the past two weeks, with long calls nearly doubling long puts. However, the stock's 10-day put/call volume ratio across these exchanges of 0.51 ranks in the 88th annual percentile, so put buying, relative to call buying, has actually been more popular than normal. 

Square Stock Defies Rising Short Interest

Outside the options pits, a number of investors have displayed growing skepticism toward SQ shares. That is, short interest has been rising consistently on Square since mid-February, including a huge 25% surge during the last two reporting periods. 

There are two things to consider with this information. First off, it's likely many of these bears are facing steep losses with their short positions, since Square stock is up 73.5% since mid-February. As such, an extended push to the upside from SQ shares could result in these short sellers throwing in the towel, which would only fuel additional gains. On the other hand, the growing short interest levels also suggests some of the call buying on Square could be the result of these shorts using options to hedge their positions. 

Analysts Could Also Spark More Gains for SQ

On top of all that, Square could be in store for more bullish analyst attention. Ten of the 23 brokerage firms with coverage on the equity maintain tepid "hold" recommendations, and the shares recently overtook their average 12-month price target of $22.52. As such, it wouldn't be surprising to see upgrades and/or price-target increases come through in the near term.