Tony Zhang's Square Trade

On CNBC's "Options Action," Tony Zhang suggested investors should take a closer look in Square Inc (NYSE: SQ) ahead of the earnings report on Thursday. He said expectations are too high going into earnings so he would use options to set up a bearish trade in the name.

The stock has been trading in a range between $200 and $270 and it has recently bounced off the top end of the range, said Zhang. He expects the stock to head back to $200 as it has already started to underperform the technology sector.

The options market is implying a 7% move in either direction, while the stock's average move on earnings over the last 8 quarters has been 8%. Zhang is concerned the options market might be underpricing a potential downside in the Square, so he wants to buy the September $240/$210 put spread to make a bearish bet.

The trade would cost him $8.60 and it breaks even at $231.40 or 6.85% below the closing price on Friday. If the stock drops to $210 or lower at the September expiration, the trade is going to reach its maximal profit of $21.40.

Photo by: Courtesy of Square Inc.