Block last week failed to break above the 200-day moving average despite three attempts. SQ stock is also showing weak relative strength, with a 28 RS Rating from IBD.
Therefore, traders who think SQ stock will not reclaim the 200-day line in the next few weeks could look at a bear call spread as an option trade.
SQ Stock Today: Setting Up The Trade
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can score profits if the stock trades lower, sideways and even if it trades slightly higher, as long as it stays below the short call at expiry.
On Friday, a bear call spread in SQ stock using the July expiry and the 70- and 75-strike prices traded around $1.10 per contract. In this trade, you would sell the 75-strike call and simultaneously buy the 70 call. On Monday afternoon, SQ stock fell 1.4% to 64.06.
Traders selling the spread would receive $110 in option premium — the maximum possible gain. The maximum loss would be $390.
The Ideal Underlying Price
The spread will achieve the maximum profit if SQ stock closes below 70 on July 21, in which case the entire spread would expire worthless. That would allow the trader to keep the $110 option premium.
The maximum loss will occur if SQ closes above 75 on July 21, which would see the premium seller lose $390 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy. You always know the worst-case scenario in advance.
You could set a stop loss if the spread value rises from $1.10 to $2.20.
As this is a bearish position, traders that think SQ stock could move higher from here should not enter this trade.
The position starts with a delta of -15, meaning it is roughly equivalent to being short 15 shares of SQ stock.
The IBD Ratings
According to IBD Stock Checkup, SQ stock ranks No. 12 in its group. It has a Composite Rating of 69, an EPS Rating of 93 and a Relative Strength Rating of 28.
Please remember that options are risky, and investors can lose 100% of their investment.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
