This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.
Should You Buy the PayPal (PYPL) Earnings Dip?
PayPal recently reported earnings and this Zack’s article outlines why the stock price dipped despite beating estimates. Also, an author on Seeking Alpha outlines why the decline following earnings can be viewed as a merely a speed bump in the broader bullish trend.
PYPL did close earlier on the day after the earnings announcement, however, the bulk of last week’s decline took place on Friday as the markets reacted to US GDP figures and weak earnings in other technology stocks. This left PayPal stock at a major support confluence to end the week. The confluence consists of a horizontal level at 85.45 which was major resistance in the first quarter now turned to support, as well as the lower bound of a rising trend channel that originates from a low posted in early May. Although there was some momentum behind Friday’s decline, recent price action has not altered the bullish technical outlook for PYPL.
If you agree there’s further upside ahead for PYPL, consider this trade which is a bet that the stock will continue to advance over the next five weeks, at least a little bit.
Buy To Open PYPL 31AUG18 83 Puts (PYPL180831P83)
Sell To Open PYPL 31AUG18 85.5 Puts (PYPL180831P85.5) for a credit of $0.98 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when PYPL was trading near $85.50. Unless the stock rallies quickly from here, you should be able to get close to this amount.
Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers). Each contract would then yield $95.50 and your broker would charge a $250 maintenance fee, making your investment $154.50 ($250 – $95.50). If PYPL closes at any price above $85.50 on August 31, both options would expire worthless, and your return on the spread would be 62% (707% annualized).
Changes to Investor’s Business Daily (IBD) Top 50 This Week:
We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run. Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.
As with all investments, you should only make option trades with money that you can truly afford to lose.