The market continues to send signals that nearby risks are elevated, and there is no clear indication to us in which direction the next sustained move will come.
So, as has been the vibe for the past couple of weeks, I'm looking for trades that can offer my portfolio some diversification.
With this in mind, Steve Strazza presented a bearish setup in Block $SQ that checks the boxes for me to add some short exposure to my portfolio to counterbalance the mostly long positions I currently have on the books.
Check out this one-year chart of $SQ:
The stock has been in a downtrend since long before the indexes peaked this summer, cementing its leadership to the downside.
We contend that if the broader stock market is in for further downside action, $SQ will likely be one of the stocks leading the way. As such, we're going to position with options to take advantage of a possible retest of last October's lows.
Here's the Play:
I like buying $SQ December 55 puts for approximately $3.25 per contract. This premium I pay today represents the absolute most I can lose in this trade.
But I'll be looking to exit long before I lose 100% of my premium. I'll exit the trade if either we see $SQ close above $65 per share, or the value of my puts lose 50% of their premium. In either case, the market will be proving to me that I'm either early or wrong and I need to protect what's left of my capital in the trade. I don't argue with what Price is telling me.
Meanwhile, as discussed in the Flow Show video above, if $SQ goes our way, we'll likely see a rise in implied volatility which will put a bid in out-of-the-money puts. If $SQ trades below $55 per share (the strike of my long options), I'll look to sell the December 40 puts against my position to bring in some credit, creating a vertical spread (a Bear Put spread) and taking some risk off the table.
I'll then either take profits if $SQ trades below our short strike ($40) or on any pullbacks as we approach expiration in December. (I'll update our stops in our weekly Jam Session as we go along).
P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7910.
