Square Options Sizzle After Bull Note

Call buying has been a popular options strategy on Square

Jan 24, 2020 at 11:21 AM
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Square Inc (NYSE:SQ) stock is running hot today, after Credit Suisse initiated coverage on the fintech name with an "outperform" rating and an $84 price target -- a 21.3% premium to last night's close. Just last week, Square landed on the brokerage firm's list of companies that could be the "next generation of potential winners" in technology, alongside fellow Jack Dorsey firm PayPal (PYPL).

At last check, SQ stock is trading up 2.8% at $71.25, and options volume is accelerated. Already today, 44,000 calls and 14,000 puts have changed hands on Square -- three times what's typically seen at this point, and volume pacing in the 97th annual percentile. Day traders appear to be buying to open the weekly 1/24 70-strike, 71-strike, and 72-strike calls, betting on more upside through expiration at tonight's close.

Speculators may also be purchasing new positions at the weekly 1/31 72-strike call. The volume-weighted average price on this out-of-the-money call was last seen at $1.13, which makes breakeven for the call buyers at the close next Friday, Jan. 31, $73.13 (strike plus premium paid). Profit is theoretically unlimited on a move north of here, while losses are limited to the initial premium paid, should SQ settle south of the strike at expiration.

Options traders have already been buying to open calls relative to puts at an unusual clip in recent weeks. This is evidenced by SQ's 10-day call/put volume ratio of 4.03 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which ranks in the elevated 96th percentile of its annual range. 

Given Square stock's strong start to the year, some of this recent call buying could be a result of shorts hedging against any additional upside risk. The 30.3 million SQ shares currently controlled by shorts represents a healthy 9% of the equity's available float.

Whatever the reason, it's an attractive time to buy premium on Square options. The stock's Schaeffer's Volatility Index (SVI) of 32% arrives in the 6th percentile of its 12-month range, meaning short-term options have priced in lower volatility expectations just 6% of the time within the past year.

Looking closer at the charts, Square shares have gained 14% year-to-date, and are currently on track for their third straight weekly win. This uptrend has put SQ back above its 200-day moving average, and above its Aug. 2 bear gap close at $69.60.

square stock daily price chart on jan 24

 

 

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