While the broader stock market is stuck in wild roller coaster mode, volatility in PayPal (PYPL) remains subdued. Matter of fact, the price action in PYPL shares is about as quiet as its ever been.
Since PayPal stock began trading in early July, it has staged some pretty epic swings. The volatility pendulum has finally swung back in the other direction, however. Things are getting very quiet, PYPL appears to have settled down for a nice, long nap.
And yet, I suspect it’s all a ruse and that PayPal stock is about to bust a move.
Think of the recent sideways chop in PYPL shares not as an entrance into a listless drift, but rather as a coiled spring building energy for an inevitable breakout.
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The recent consolidation in PayPal has taken on the form of a symmetrical triangle. As the price approaches the apex, a breakout in one direction or the other becomes increasingly likely.
The beauty of the pattern is it provides a clean entry point for spectators looking to get in on the action.
Watch for a breach of the upper trendline — say, around $34.50 — to confirm an upside resolution of the pattern.
The PYPL Bull Put Spread
If you’re willing to bet on a bullish breakout, consider selling bull put spreads on PYPL. By using out-of-the-money options, you can structure a trade that will profit even if PayPal stock simply wanders sideways for the coming weeks.
Sell the Oct $32/$29 put spread for 50 cents. Consider it a wager that PayPal’s stock price remains above $32 for the next 22 days. If it does, you will capture the max reward of 50 cents. If you want a little more confirmation before pulling the trigger, wait for a break of the aforementioned $34.50 resistance level before entering.
The max risk is the distance between strikes minus the net credit, or $2.50, and will be lost if PYPL ends up breaking lower and tumbling below $29 by expiration. To minimize the loss, consider exiting if the stock falls much below the $31 level.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
