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How To Trade A Leveraged Covered Call On Square Stock

Square (SQ) is currently ranked No. 1 in the credit and payment card group and has an impressive Composite Rating of 98, an EPS Rating of 99, and a Relative Strength Rating of 88.




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Traders can go long the stock, but aggressive traders can use options to trade a leveraged position via a strategy known as a poor man’s covered call. 

To execute a poor man’s covered call, the trader will buy a long-term, deep in-the-money call and sell a short-term out-of-the-money call. 

The long-term bought call effectively replaces the long stock position at a fraction of the cost. 

To trade a covered call on SQ stock, an investor would need to buy 100 shares of the stock at a total cost of around $27,000. 

A similar exposure can be obtained through buying a June 17, 2022-expiring call with a strike price of 220. That call was trading on Friday (and Tuesday) for around $67, or $6,700. That’s much less than it would cost to purchase 100 shares. 

Sell Calls To Create Income On Square Stock

The trader can hold that call as a bullish trade or sell monthly calls against that position to reduce the cost and generate some income. 

For example, selling an Oct. 15 call with a strike price of 300 would generate $365 in premium and still provide some capital-gain potential. 

The downside of the trade is that gains and losses will be magnified because you are effectively trading a leveraged position. 

In terms of risk management, I would rethink the position if Square stock dropped below 245. That’s around 8% below the current price. 

Square Stock Earnings Expected In Early November

The delta of the initial position is 57. That means the exposure is equivalent to owning 57 shares of Square stock, although this will change over time as the stock moves. 

If the October 300 call expires worthless, traders can continue to sell monthly calls against the long call option. 

Square earnings are estimated to be around Nov. 1. 

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 Twitter at @OptiontradinIQ 

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