Dec 17, 2021
It’s been a rough few months for fin-tech payment firms Block Inc. (SQ) and PayPal Holdings Inc. (PYPL) with recent selloffs pushing both into negative territory for 2021. That being said, both stocks had a stellar 2020, quickly emerging from the pandemic lows and launching to new highs as the world relied heavily on digital payments. Block was hit hard again this week on news it now faces a lawsuit from H&R Block regarding its name change from Square Inc.
Revenues for SQ dipped in Q3 despite still being 42% higher than the same quarter last year and 126% higher than Q3 2019. This could be signs that the continued quarterly growth, that fueled the stocks meteoric rise, could be slowing. Additionally, these factors might make investors potentially wary until they see they a fresh set of financials.
While PYPL sees less consistency in revenue growth than SQ there are definite indications of slowing growth in earnings per share (EPS) numbers. Q3 EPS was 7% higher than Q3 2020, compared to 123% growth from 2019 to 2020.
Turning to the options markets, SQ indicates a current implied volatility (IV) of 59%, PYPL shows 44%. The implied volatility ranks (IVR) for the two are 69 and 47 respectively. The higher IV in SQ means the options are richer relative to PYPL, due to heightened expected future movement. SQ options are also priced in the higher end of the range relative to the last year, as indicated by the 69 IVR.
Regardless of a trader’s sentiment on these stocks, there are a myriad of options strategies in to potentially play SQ and PYPL. Today’s Alpha Boost email from Quiet Foundation highlighted several potential strategy ideas.
Traders positioning for SQ to rally or at least stabilize at these prices may be interested in a Jade Lizard strategy, combining a short naked put option with a short call spread.
In this example, the net credit ($6) is $1 over the width of the call spread ($5). This means there is no theoretical risk should SQ continue to rally past the call spread strikes and the trader would keep the $100 in premium. The downside breakeven price, at which the trade would begin to lose money at expiration, is $139, an additional 15% below the current price.
Aggressive traders who are bearish in SQ and expect further drops in the stock might be comfortable selling the 195 naked call.
Given the initial buying power requirement, this trade managed at 50% of max profit would yield around a 7% return on capital. Keep in mind that margin requirements can increase during the life of the trade. Traders utilizing short calls should be ready to manage the trade and willing to accept a loss if the stock rallies up to or beyond the call strike. If SQ is trading above 195 at expiration and the trade is not closed, the trader will be assigned short SQ stock.
More indecisive traders might opt for a neutral trade if they hope for SQ to stay ranged bound over the next month.
This Iron Condor will perform best with SQ trading between the short strikes of 145 and 185, about $20 on each side of the current price. Traders utilizing an Iron Condor would sacrifice the wider profit zones of an undefined risk trade, while substantially lowing the capital required to place a trade in SQ.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
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