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Are You Trading This Opportunity in PayPal

July 17, 2018

Paypal Holdings, INC. (PYPL) recently hit all time high to rise just above $89. As a user of PayPal services, this stock has been in my list for the past several years. I am still attracted to PYPL from long term trading perspective. However, I think, here it presents an excellent opportunity to trade options on PYPL.

Company Description (Source: Yahoo finance)

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. Its payment solutions include PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company’s platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. It also offers gateway services that enable merchants to accept payments online with credit or debit cards. PayPal Holdings, Inc. was founded in 1998 and is headquartered in San Jose, California.

Over the course of last one year, PYPL has gone up over +50% and year till date in 2018, PYPL is up +18.8% (vs. SPX which is up almost +5%). Here is last one year chart marking my desired break-out zone in green colour.

There are several options trading strategies that one can use to construct a bullish trade on PYPL.

My preference, however, at this stage is to sell to open a Bull Put Spread. While at it, do remember that PYPL will announce earnings on 25 Jul 18 and if you don’t like the earning uncertainty, you might want to stay away from the trade (or close it before the announcement).

Bull Put Vertical Spread is an options trading strategy designed to profit from a rise in prices of the underlying asset we’re trading (Read a comprehensive post on vertical spreads). This is an Options Selling strategy and gives net credit at the open.

One may also choose to use that credit to partially finance a Call Option but that means, you wouldn’t have any cushion in case the stock pulls back.

 

Trade Set-up

Here is a Bull Put Spread set-up that I would consider :

  • Sell To Open 17Aug18 85 Put
  • Buy to Open 17Aug 80 Put
  • Total credit: $1.18
  • Total Max Risk: $5-$1.18= $3.82
  • Risk Management plan: I will close the trade should PYPL closes below $86. This way my risk is not exactly $3.82 but much lesser at approximately $0.40 (1R); Thus, broadly speaking, this is actually a  1:3 risk/reward trade set-up.
  • I will also close this trade 1 day before PYPL earnings announcement so as not to carry earnings overnight risk.

Here is how Risk/Reward will look like:

Position sizing is key. Regardless of how confident I am about my trade identification, I wouldn’t allow capital invested to go over my portfolio guidelines; and I wouldn’t allow max risk to be greater than what’s allowed per trade. If you do decide to follow-up on this trade, please ensure you know what you are doing and be comfortable with the risk in the trade.

Your Turn

I’d love to hear from readers: If you were to choose a Bullish options set-up, how would you trade this opportunity? where will you set-up your stop loss? Feel free to share your ideas and I will be glad to reply/provide feedback.

Disclaimer: As of this writing, US markets are closed and I am not in this trade yet. I might go into the trade once markets open. Please do your diligence, talk to your financial adviser and read our website terms of use before you follow any trade ideas listed here.

7 Comments

  • OptionPundit says:

    Above spread could have been opened for >$1.35 as PayPal opened <$87 in the initial few minutes but at the end of day 1 PYPL closed @88.5. So even after assuming $1.18 opening price, above bull put spread closed for +4.7% gains in a day.

  • Manish Somani says:

    Thanks Manoj for sharing in detail. I followed your post and was very much convinced in PYPL trade with bull put spread and exit before earnings om 25 July. On day one, my profit is 7.8% on capital invested.

  • Jialong Liu says:

    Hi Manoj, are you still carrying these bull puts? I filled 5 @ $1.25 last Thursday and it went into market loss only for today’s open.
    I am not too worried about the risk cuz it is properly sized for me.
    But I am just wondering are you planning to close them before earnings Wednesday AMC?

    • OptionPundit says:

      @Jialong, I’m Carrying, it just dipped $0.18 below the $86 for a brief period (not really on close basis), also it was too quick at the open, not enough time to even have the verticals filled. Bottomline- I’m still in the trade.

      I will reveiw on Wednesday If I should close it before earnings..

      Happy Trading.

  • OptionPundit says:

    Here are my real money screenshot of $PYPL trade. I invested the credit received to purchase calls that I closed yesterday for +67% profit. I plan to close the Bull Put Spreads today.

    PayPal Options Trade Transactions

  • OptionPundit says:

    Here is the real money trade screenshot for the closure of the Bull Put Spread for $0.53 debit (it was sold for $1.10 credit), thus brining +14.6% gains on Bull Put Spread Vertical spread. Earlier, the Call Options were closed for +67% profit.

    PayPal $PYPL Bull Put Spread Close

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