Short PayPal Holdings Inc (PYPL) Stock Into Earnings … For Free!

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Coming into its Wednesday earnings report, PayPal Holdings Inc (NASDAQ:PYPL) is up 55% in 12 months. This is an impressive feat that has seen it beat the old dogs of the sector Visa Inc. (NYSE:V) and MasterCard Inc (NYSE:MA), who are up an impressive 25% and 38%, respectively, over the same time. Square Inc (NYSE:SQ) has PYPL stock beat, but it’s the freshest one, so it’s understandable it attracts more buyers for now.

Short PayPal Holdings Inc (PYPL) Stock Into Earnings ... For Free!

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This impressive rally in PayPal stock presents traders with a problem, however.

Momentum stocks that move this fast are tough to time. On the way up, they seem like they are due for a pullback at any time, so traders sit and wait. But on the way down, they look like they’re falling into an abyss, and few traders are willing to catch that kind of falling machete.

My solution: Use options rather than trade straight up. Thus, with PYPL stock, I can fashion a trade to suit my thesis and leave room for error. I risk less to gain more. And if I get the direction correct, the percentage gains in options dwarf those in the stock itself.

Fundamentally speaking, PayPal trades at a higher price-to-earnings ratio than Visa and MasterCard, and it runs thinner margins. It’s definitely more expensive. Furthermore, both V and MA pay (modest) dividends that add to the value they offer. If not for the excitement of being a newer kid on the block, PYPL would not be my first choice of the three.

But I’m still willing to ride the bullish wave on PayPal … just not at this exact moment.

PYPL stock chart
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Right now, I want to short PYPL stock into earnings because I think it’s technically overextended and due for a pullback. But before you call for my arrest for shorting such a nice trend, I assure you that I will use the perceived value in the stock to completely finance my short. So consider this a temporary bearish trade on the price action, but not the company itself. Said differently, I’m short-term bearish on PayPal shares, but mid-term bullish on PayPal the company.

Pivotal to my pair trade today is that we’re willing and able to own PayPal stock, just lower from here. Given that most payment transactions are becoming electronic, I believe that all transactors have room to thrive. Long-term, PYPL will do just fine, and I’m confident that if I have to own shares, I can manage my way out of them with no serious damage.

Analysts expect a lot out of PayPal, so I have to extrapolate that Wall Street traders do, too. If management doesn’t deliver more than expectations, the stock will suffer short-term risk. This would be perfect for my trade, which yes, is on a binary event.

Trading short-term earnings reactions is more akin to gambling than investing, as they often have little to do with the report itself. The direction more has to do with what they say versus what traders expect.

How to Trade PYPL Stock

The bearish bet: Buy the 25 Aug $57/$56 debit put spread for 30 cents cost to open. We need the stock to fall through our puts; if that happens, we double our money. The faster the better!

Since earnings moves are pure guesses, we should completely eliminate our out-of-pocket expense by selling downside risk against the value in PYPL stock. I wouldn’t suggest this if I didn’t believe in the company’s long-term prospects.

The bullish bank: Sell the Jan 2018 $44 put and collect 60 cents to open. Here we have a 90% theoretical chance that price will stay above our strike so we can retain my maximum gains. Otherwise, we would accrue losses below the strike, but remember: We still would benefit short-term from the bearish segment of the trade.

Taking both trades would result in a net credit, so even if PayPal stock rallies and never falls below our bearish bet, we still make money. As long as the stock price stays above the puts we sell, any premium we salvage from the bearish bet would be pure profit.

There are no guarantees when investing in the stock market, so never bet more than you’re willing to lose.

Learn options as easy as 1-2-3 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.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/short-paypal-holdings-inc-pypl-stock-into-earnings-for-free/.

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