The rise in bitcoin may have helped Block (SQ) the last couple months, but the news of bitcoin ETFs hasn’t helped bitcoin’s price lately. With SQ stock getting stuck below its 21-day moving average line, here is a bear call spread that assumes it won’t move much higher that 70 in the next few weeks.
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Setting Up A Bear Call Spread On SQ Stock
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.
For SQ stock, a bear call spread could start with a short call at 75 with a Feb. 16 expiration. That traded around 1.72 this morning.
Matt Caruso joins the Investing With IBD Podcast this week with some thoughts on SQ stock
Of course a short call has unlimited risk if the stock moves higher. We can use a long call at 75 with the same expiration to define the risk. That means we won’t bring in as much credit since we’ll have to pay about 72 cents for the long call. But, our losses will be capped if SQ stock shoots higher than 75.
Traders selling the spread end up with a net credit of 1.00 in option premium, which translates to $100 per contract. That’s also the maximum possible gain for the trade if SQ stock finishes below 70 on Feb. 16. Both legs of the option trade expire worthless in that case, leaving the trader with the entire premium.
Managing Risk
The maximum loss would be $400. You calculate that taking the width between the strikes ($5) and subtracting the premium received ($1) and multiplying by 100 shares ($400).
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance.
A stop loss could be set if the spread value rises from $1.00 to $2.00.
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 -16, meaning it is roughly equivalent to being short 16 shares of SQ stock.
According to IBD Stock Checkup, SQ stock ranks No. 9 in its group. It holds a Composite Rating of 84, an EPS Rating of 97 and a Relative Strength Rating of 94.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
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 X/Twitter at @OptiontradinIQ
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