Stocks rallied hard across the board Tuesday on optimism predating Wednesday’s Federal Open Market Committee meeting. While most equities were overdue for a bit of a relief rally, some rock stars outdid themselves. One of the top performers Tuesday was PayPal (PYPL) which climbed 3.74% on heavy volume.
Since its spinoff from eBay (EBAY) PayPal stock has wandered aimlessly. Although it’s had a few rousing rallies and drastic downturns, PYPL is virtually unchanged from when it started trading in July.
On the bright side, PYPL stock has now been trading long enough to calculate a few key moving averages as well as have some support and resistance levels to trade off of.
Which brings us to Tuesday’s surge.
The sweet looking breakout in PYPL completed a consolidation pattern forming in the stock over the past six weeks.
Click to Enlarge
As the accompanying chart reveals, PayPal stock developed a descending triangle complete with lower pivot highs and equal pivot lows. Yesterday’s break of the down trendline was just what the bulls have been waiting for.
Assuming today’s Fed meeting doesn’t throw a cold blanket on the nascent market rally, look for PYPL stock to retest the highs of the triangle pattern at $38.50 in the weeks ahead.
The implied volatility of PayPayl stock options is neither high nor low right now, so option traders can take their pick in structuring a bullish trade here.
Trading PYPL Stock
Consider buying the PYPL April $35/$40 call spread for $2.35. Since we’re able to enter for less than half the width of the spread, the trade offers the ability to more than double your money. The max loss is limited to the initial $2.35 debit and will be forfeited if PayPal stock price sits below $35 at expiration.
The max gain is limited to the distance between strikes minus the net debit, or $2.65, and will be captured if PayPal stock price can rise above $40 by expiration.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
