PayPal Holdings Inc (NASDAQ:PYPL) has had a meteoric rise in 2017, especially since its recent earnings report. So it’s not surprising to note that PYPL stock is expensive relative to Visa Inc. (NYSE:V) or Mastercard Inc (NYSE:MA) from a price-to-earnings point of view.
This makes PayPal a difficult choice, especially considering it runs thinner margins than the credit card processors, and offers no dividends.
So when I choose to invest in PayPal stock instead of the competition, it would be only based on future prospects. All three stocks have steep ramps, but I’m more comfortable betting on the new kid on the block. My vote is that the younger contender should outmaneuver the older ones.
The problem? Fast-moving stocks like PayPal leave little room for entry. They rally so fast that they seem perpetually due for a pullback. That is why I use options, where I can build a buffer to my thesis.
As more of my transactions migrate to online, I personally find it easier to use PayPal than the traditional transactors. Analysts are split among the top three ratings, so I could safely assume that the chances of surprise downgrades is low.
Today’s trade is not so much a play on current valuation of PYPL stock, but more on what’s going to be the PayPal of the future. Of the new transactors like Square Inc (NYSE:SQ), PayPal is already well-footed and profitable.
Since I am betting on the future value of PayPal, the current ramp-up in the stock doesn’t scare me much. After all, I’m banking on the step up in stock price. So I will assume that PYPL stock under $44 was too cheap. I’m not alone in this; Wall Street emphatically rallied off the $44 base.
I missed that trade, but I can still get in at $44. Kinda.
How to Trade PYPL Stock
The trade: Sell the Jun 2018 $40 puts naked and collect $1.25 per contract. Here, I have a 90% theoretical chance that I could keep my maximum gains. But if PayPal’s price falls below my strike, I will accrue losses below $38.75.
For those who don’t like selling naked puts, I can use credit spreads instead.
The alternate: Sell the Jun 2018 $40/$38 bull put spread, where risk is more finite. However, this trade on PYPL stock can still yield 13% — not bad compared to buying the stock outright amid this insane run and hoping it rallies by double digits from here.
Selling options is risky business, so never risk more than you are willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
