The market is in full roar after the recent move sparked by huge earnings from Nvidia. Traders normally let this one have a breather before it sparks the next move. Therefore, let's look at another big mover on earnings, Block and consider a calendar spread in SQ stock.
If the trade in SQ stock works out, we'll have room to sell future options in-between the April strike and the September strike.
The economic calendar is light Friday, then gains steam Tuesday to Thursday next week. So traders are looking for some consolidation before another move north. Plus, having stock prices higher still appears more favorable in the overall bullish context of the market.
The take-away remains: Wait for pullbacks to go long and stay within groups that have favorable market views.
Keep some dry powder in the portfolio. Also, nothing is wrong with feeding the ducks (taking some profits) at new highs to trade around positions.
SQ Stock Today
Going back to SQ stock, the outlook on Block remains positive and it currently sits in a basing formation.
The long call calendar spread is a neutral to bullish position. In this trade, we estimate that the price of SQ stock will rise over the longer term to deliver stellar results. We can take advantage of any dips in the market to create a new position in the stock of our choice while holding on to the position through any big spikes.
Let's set up the long call calendar spread for SQ stock in the following manner:
- Sell to open 1 SQ May 17-expiration call with an 80 strike price
- Buy to open 1 SQ Sept. 20 80 call
Total debit of $3.28 per share in a set of contracts, based on recent trading, places the break-even cost at $83.28. That is, take the price of the first long option strike, $80, plus the cost of the option.
Four Square Choices
The ideal strategy result gives us four choices to exit the trade. One, sell the entire calendar spread in SQ stock once it carries an acceptable profit. Two, sell the entire calendar spread once it hits your loss threshold as determined by personal risk.
Three, one could sell the entire calendar spread if there is a swift upward price rise right after entering the trade, with more than two weeks to expiration of the September strike. And four, allow the short call strike in the calendar spread to expire worthless, and then sell another option in June, July and August. Doing this reduces the cost of being long by continuing to sell against the 80 resistance price level.
Now, if SQ stock breaks out of the base, it has lots of room to run. But if it does not, risk exposure stays limited.
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
The goal of taking the calendar trade? Gain exposure to profit but significantly limit loss if we are incorrect.
Options sellers are positioned to win in two ways. Either SQ stock does nothing, or Block moves within the ranges relative to the strategy. Using this concept minimizes the risk of market exposure.
Trade Management: Identify Key Chart Levels
The monthly resistance zone sits near 80, as Block undergoes a multi-month basing event. Buying support sits near 70.
If we see some sharp dips, we will be able to consider adding to the position if market indicators show increased probabilities of more upside. This will increase your risk, so think this through. Be patient in the current flow. Realize that macro events could boost volatility.
Let's go through these scenarios:
- With earnings behind us, we now expect the chart to range before breaking out. This is the primary reason that I am suggesting a trade that needs time to unfold.
- SQ stock grinds higher much earlier in the cycle and the option position increases in value by more than 100%. We could choose to sell the entire position and quickly take the gains, freeing up more capital to trade.
- SQ stock grinds higher and tests or breaches 80 but immediately retreats. This suggests traders are not willing to pay more for the stock at the present time. That is ideal action, but only if it occurs in the near term and into the September expiration strike.
- Block shares break down in heavy volume for more than three days and that breaks our personal risk threshold for the trade. We exit the trade.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully. Be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
