Block stock has put in a series of lower highs and lower lows in recent weeks. On Tuesday, SQ stock broke mildly below the 50-day moving average. SQ stock is also showing weak relative strength. The RS Rating is a mediocre 58 on a scale of 1 to 99.
Therefore, traders who think SQ will not reclaim the 50-day line in the next few weeks could look at a bear call spread option trade.
SQ Stock Today: Trade-Setup
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable 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 Tuesday, an SQ bear call spread using the March 17 expiry and the 80 and 85 strike prices traded around $1.10. Traders selling the spread would receive $110 in option premium for a block of 100 shares. Treat that as the maximum possible gain. The maximum loss would be $390.
The spread will achieve the maximum profit if SQ stock closes below 80 on March 17, in which case the entire spread would expire worthless, allowing the trader to keep the $110 option premium.
Risk Vs. Reward
The maximum loss will occur if SQ closes above 85 on March 17. This 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. Thus, you always know the worst-case scenario in advance.
A stop loss could be set if the spread value rises from $1.10 to $2.20. As this is a bearish position, traders who think SQ stock could move higher from here should not enter this trade.
The position starts with a delta of -11, meaning it is roughly equivalent to being short 11 shares of SQ stock.
According to IBD Stock Checkup, SQ stock ranks No. 14 in its group and has a Composite Rating of 73, an EPS Rating of 89 and a Relative Strength Rating of 58.
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
