Last week I closed a covered-call position on Square (SQ). On Friday, January 15th, SQ shares traded around $234 and our strike price on the covered call was nearly 50% higher than the market (strike: $340) while the short position in the call option contract expires on February 19th.
We sold the call option contract for $200 on 21DEC2020, 26 days before closing this past Friday. The position netted $168.61 for selling the right to buy well above market. SQ shares have treaded water since we wrote the call. After maintaining the position for three weeks, the market has decided the call option contract is worth only 15% of what we were paid.
I like the exposure to SQ and we were lucky to acquire the position when we did. During the market reset in March I allowed a short position in a SQ put option contract to distribute shares. The market had taken SQ shares well below our $59 cost basis, but we’ve held the 100 shares for roughly ten months and, as of Friday, SQ has appreciated to almost three percent of our portfolio. For perspective only nine companies in our portfolio maintain a more valuable position.
We will write another covered-call option contract for SQ – again – well above the market. In Fall 2020 closing covered-call positions became quite expensive but this time I am ready. Were our shares of SQ to appreciate to be called away from us I would happily relinquish the shares and purchase a smaller stake in SQ. First, the strike for any covered call I write will be well, well above the market. Second, I’d like to pull back our exposure in SQ to be more inline with our exposure to other payment processers (PayPal, Visa, and MasterCard). Initially we had invested an equal amount in SQ’s more established competitors; PayPal is now 1.8% of the portfolio while exposure in MasterCard and Visa sum to 1.5%.
Payment processors are well positioned to benefit from the pandemic due to consumers’ aversion to cash and more frequent online shopping. Given the market outperformance for such pandemic darlings, especially SQ, trimming our position may well prove prudent. Note to self: wait for the market price of SQ to surge before initiating the next covered call.
One-Year performance of SQ shares noting our late-March entry point. Source: MarketWatch; accessed 19JAN2021.