How Options Traders Took Advantage of Square Stock's Rapid Rise

Shortly after our recommendation, SQ gapped higher after earnings

Managing Editor
Sep 6, 2018 at 12:06 PM
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Subscribers to Schaeffer's Event Trader more than tripled their money in a little over a month with the Square Inc (NYSE:SQ) weekly 8/31 71-strike call. We're going to take a look back to see why we were initially bullish on SQ stock, and how the options trade unfolded.

At the time of our recommendation on Thursday, July 26, we noted that SQ had pulled back near $72, just ahead of its second-quarter earnings report on Aug. 1. This was roughly double its year-to-date breakeven point, and eight times its November 2016 initial public offering (IPO) price of $9. This area was also above the stock's June highs, and sat atop a channel connecting higher highs and lower lows, indicating a possible accelerated uptrend was forthcoming. 

Analyst sentiment toward the payment processing name was quite bleak, though. Of the 29 brokerages covering SQ, 17 rated it a "hold" or "strong sell." In other words, there was ample room aboard the bullish bandwagon, and upgrades could provide more tailwinds for the equity.

In the options pits, there was heavy accumulation of put open interest at the August 70 strike, and short positions related to this put open interest would likely be unwound in the event of a positive reaction. At the time of our recommendation, a healthy 11.7% of the stock's available float was sold short.

Square stock gapped higher following an upbeat quarterly report after the close on Aug 1, adding 8.7% the day after. The equity continued to climb from there, boosted by frequent bull notes from analysts. We closed out half of the position on Aug. 28, when the call had roughly doubled in value. As SQ continued its torrid pace in the midst of a 12-day winning streak, we closed the other half of the position at around 300% on Aug. 30, for a bottom-line profit of 206%.

Trade PM SQ Chart

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