Earnings season typically brings opportunities for massive upside, assuming of course that you get the call right. For those who are willing to engage in high-stakes wagers, financial technology (fintech) powerhouse Block (SQ) is set to disclose its third-quarter earnings results. Barchart content partner Motley Fool believes that SQ stock could pleasantly surprise and it’s difficult to argue against the point.
Sure, the equity hasn’t exactly thrilled stakeholders so far this year, losing a hair under parity. However, over the past 52 weeks, SQ stock gained 64%. What’s more, TMF argued that fundamentally, Block “stands out as a fintech pioneer and payments industry innovator driving the ongoing digitization of global commerce and banking.”
As author Dan Victor writes, the “opportunity for the company's Square and CashApp ecosystems to gain an expanding slice of an estimated $205 billion addressable market highlights a significant runway. Segments like mobile payments, digital banking, buy now, pay later (BNPL) commerce, and peer-to-peer transfers are still seen as being in the early stages of a secular tailwind.”
Adding to the encouraging backdrop, merchants using Block’s platforms are taking advantage of a greater array of products and services, thus yielding higher recurring revenue streams. In addition, the company’s exposure to cryptocurrencies should be a huge plus, considering the meteoric rise of the sector.
Interestingly, the average implied volatility (IV) — or the market’s expectation of forward movement — stands at 65.43% on average, well above the historical volatility (HV) of 26.93%. In this case, it might be better to sell options due to the higher premiums. However, the technical dynamic may force an audible.
The Market Appears Primed for a Breakout in SQ Stock
While the realm of technical analysis delves into subjectivity, in my opinion, there’s a clear bullish setup being formed in the charts. Between early last month to Oct. 18, SQ stock appears to have formed a flagpole formation. Subsequently, the price action entered a consolidation phase called a flag or pennant. At the apex of this consolidation, SQ could see a breakout move.
Of course, the criticism of such a narrative is that it’s hocus pocus. However, the upcoming earnings report — which is scheduled for Nov. 7 after the market close — lends tremendous credibility to the above hypothesis. Either way, SQ stock is likely to move strongly in one direction or the other. Fundamentally, the winds seem to point northward.
Interestingly, SQ stock represented one of the top highlights of Barchart’s screener of unusual options activity on Friday. Specifically, the $77 call expiring Nov. 8 saw volume hit 8,181 contracts. What’s also curious is that within the options flow screener — which focuses exclusively on big block transactions likely placed by institutional investors — this call’s volume hit 5,200 contracts.
In other words, almost 64% of demand for this derivative hails from institutional players. By logical deduction, selling this call should yield higher-than-normal premiums. Using the proceeds from this sale, a trader could offset some of the debit of a lower-strike-price call; that is, buy a bull call spread at a relative discount.
With less than a week to expiration, a call spread could be a compelling (albeit still risky) opportunity. First, you would effectively buy a call option at a lower price. Second, the reduced debit would also lower the threshold to profitability. To be fair, the short leg of the call spread also caps the maximum reward. However, because the option is expiring in a few days, the benefit of theta is quite limited.
Block Could Shock the Pessimists
It’s important to realize that while the high IV of SQ stock projects significant movement, this kinesis isn’t guaranteed to be for the upside. Instead, it’s not at all impossible for shares to collapse. However, with the excitement of cryptos combined with the overall fintech space, if I were a betting man, I’d say that SQ will move higher.
If so, the magnitude of bullishness could be shocking. Using a standard stochastic calculation — which involves taking the product of the share price, options chain IV and time decay adjustment (the square root of the days to expiration divided by 365 days) — the projected unit move in either direction could be $10.09.
If so, SQ stock could be over $82, well above the short leg strike of $77. That’s what makes this call option so intriguing. It’s ambitious but it also leaves some margin in case the subsequent bullishness isn’t as robust as the market IV projects.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
