Block’s (SQ) Unusual Options Activity Highlights Another Tempting Crypto Proxy Trade

Although investors are understandably buoyed by the dramatic rise in cryptocurrencies, there’s also some underlying concern that eventually, the sector could incur a correction. Still, for now, it’s obvious that the bulls have complete control. For those who are convinced that the rally can still keep going, crypto proxy play Block (SQ) presents an enticing idea.

To be clear, I don’t mean to dismiss the company simply as a proxy. Block represents one of the biggest names in the financial technology (fintech) space. It’s relatively easy to make the argument that its broader business symbolizes the pulse of the “new economy.” However, part of that description stems from its strong support of cryptos and the underlying blockchain technology.

Further, it must be said that prior to the post-election surge in digital assets, SQ stock wasn’t performing all that well. Following the surprise victory of Donald J. Trump, however, Block found its mojo. Thanks to the aforementioned support of decentralized assets, SQ investors have been reaping the rewards.

Naturally, if you’re truly bullish on virtual currencies, you would acquire the assets themselves. However, proxy wagers like SQ stock have their place. True, buying the security outright in the open market might not be as exciting. On the other hand, trading options can substantially boost leverage, potentially yielding big profits over a relatively short time period.

Unusual Options Activity for SQ Stock Catches No One by Surprise

With the total market capitalization of all cryptos steadily rising toward the $3.1 trillion mark, it should come as no surprise that SQ stock has been a powerful beneficiary. Again, Block is much more than a crypto proxy. However, because the company has made big investments in the ecosystem, its equity is able to hitch a free ride.

In that context, it was predictable that SQ stock represented one of the top entities in Barchart’s screener for unusual stock options volume. Specifically, total volume on Monday hit 251,993 contracts against an open interest reading of 737,643 contracts. Further, yesterday’s volume stood 163.48% above the trailing one-month average metric.

Even more notable, call volume clocked in at 221,728 contracts, leaving only 30,265 contracts for puts. To be fair, options sentiment is difficult to read because every derivative bought symbolizes a derivative sold. Undoubtedly, though, because of the excitement over the crypto sector’s blistering run, many of these calls can be interpreted at face value — meaning people are buying them.

However, looking at the unusual options activity for individual strike prices, Barchart notes a conspicuous spike in sold calls. One in particular is the $94 call with an expiration date of Nov. 29, 2024. With 187 contracts sold short on Monday relative to one unit in open interest at the time, it’s possible that the smart money is starting to become skeptical.

Nevertheless, I don’t want to discount the euphoria in the digital asset space. In the near term, a risky but enticing idea is to sell the $94 call but as part of a bull call spread.

Taking What the Market Gives You

By selling the aforementioned call, we may be able to extract a higher premium for it; after all, if the smart money is selling it, that may translate to huge interest among the public money to buy it. This is about taking what the market gives you.

In addition, a stochastic analysis reveals that the market anticipates SQ stock to rise to $98.09 by Nov. 29. This is calculated by multiplying these three metrics: Monday’s share price, the average implied volatility of the target options chain (46.31%) and the time decay adjustment (square root of the calendar days to expiration divided by 365 days). The product comes out to $7.30, which is added and subtracted to the share price to reveal the high-low range.

Interestingly, Barchart’s Expected Move calculator is more conservative. Its algorithms indicate that the high-low price range for SQ stock may be $95.81 and $85.78, respectively. Of course, it’s worth pointing out that the $94 strike price fits well within both methodology’s upside price targets.

With that in mind, I’m tempted to further investigate the 88/94 call spread. Here, the breakeven price is only $91.06, just 0.3% up from Monday’s close. You’d also put a relatively modest $306 at risk for the chance to earn $294 or a payout of 96.08%.

SQ stock needs to rise to $94 or higher to reach maximum profitability. That’s 3.54% up from yesterday’s close, which both the stochastics and Barchart’s algorithm indicate is within the realm of possibility. It’s still risky but it’s a nice payout for less than two weeks’ worth of speculation.