Weekend Trader Alert
March 5, 2023
Open Positions Update
- Close the Goldman Sachs (GS) April 21, 2023, 350-strike call on Monday, March 6. Close the position at a limit price within the range of the current market price when you place the order.
- Close the Charles Schwab (SCHW) May 19, 2023, 77.50-strike call on Monday, March 6. Close the position at a limit price within the range of the current market price when you place the order.
The following is this week's recommendation:
Block (SQ)Place a limit order to buy the Block (SQ) May 19, 2023 80-strike call at a limit price within range of the current market asked price when you place your order. At the close on Friday, March 3, this option was offered at $9.50. SQ closed at $80.88 on Friday, March 3.Do not attempt to enter this position after Monday's close.Please use the following guidelines to manage the position:
- Exit the position if the option is at a 100% gain from your entry price.
- If the option has not reached its target profit by 3:00 p.m. Eastern time on Monday, April 3, close the position.
- If there is a change to the above closeout parameters, we will notify you in your regular Sunday evening communication.
The shares of Block (SQ) have formed a large cup and handle pattern, with a breakout out at the handle. The security is also firmly above the 20% year-to-date level and 252-day moving average, after testing the 200-day trendline. The stock's November, December, and early January highs also provided support. Bearing this in mind, we are initiating a new long position on SQ.
Short-term options traders have been much more bearish than usual, per the equity’s Schaeffer's put/call open interest ratio (SOIR) of 2.06, which ranks higher than all readings from the past year. The last time this reading was this high was in April 2020, before Block stock staged a major rally.
It’s also worth noting the 77-strike put could become the peak level after March expiration and support the shares in the event of a pullback. Meanwhile, large call open interest (OI) at the May 100- and 105-strikes could act as a magnet moving forward, pulling SQ higher.
Premiums on Block stock look attractively priced right now. The equity’s Schaeffer's Volatility Index (SVI) of 56% stands in the low 4th percentile of its annual range, indicating options traders are pricing in low volatility expectations.
Our recommended May 80-strike call has a leverage ratio of 4.9, and will double in value on a 22.4% pop in the underlying equity.
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