Wednesday we saw heavy selling in the mega-tech stocks. The Nasdaq PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) fell 1.7%. It was not all bad news. The Dow Jones Industrial Average and the small caps actually had record days and rose 0.4%.
Specifically, traders bought financial stocks in droves. The Financial Select Sector SPDR Fund (NYSEARCA:XLF) gapped up and ran 1.7%, and that after a 2.5% day on Tuesday. Unfortunately there were a few exceptions. The financial transactors sold off hard.
Paypal Holdings Inc (NASDAQ:PYPL) got caught up in the exodus and it fell 6% on the day. Luckily it has had a fabulous year so it’s still up 85% in 11 months. That is not as aggressive as Square Inc (NYSE:SQ) but twice as good as Visa Inc (NYSE:V) or Mastercard Inc (NYSE:MA).
While Wall Street dissed the sub-sector on Wednesday, the fact remains that PYPL has been kicking hinds and taking names.
And as consumers move spending to electronic formats, transactor companies become even more attractive than they already were. So to change the outlook of a quality stock like PYPL based on one day’s price action is not logical. And therein lies my opportunity.
I like to go long quality stocks that have had a correction of sorts. While a one-day dip is not necessarily a bottom, I am willing to own PYPL shares at a discount from here. Bitcoin is an extreme electronic currency or value exchange concept that is gaining popularity. As we get more familiar with it, we get even more comfortable with e-transactions in general. So more of us will become more apt to using PYPL services in the future. New clients will translate into sustainable growth.
Fundamentally, PayPal stock is not cheap, with a price-to-earnings ratio of 57x. But at least it runs decent margins. Given its growth, price has room to rise over time. Since I can’t pointedly argue for value, today’s trade will be more based on price action and support levels than value.
Click to Enlarge Technically, I don’t usually catch falling knives on their first day of negative price action. But Wednesday’s events were extreme, so normal procedure does not apply.
I consider this a starting point into a long-term position. Otherwise, I would generate income with no money out of pocket.
PYPL Stock Trade Idea
The Trade: Sell Jan 2018 PYPL $67.50 naked put for 85 cents per contract. Here I have an 80% chance of success. But if the price falls below $66.65 I will accrue losses.
Selling naked puts carries big risk especially for a fast moving stock like PYPL. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the Jan 2018 PYPL $67.50/$65 credit put spread where I have the same odds of winning but with smaller risk. Yet if the spread wins it delivers 15% in yield.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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 as @racernic on twitter and stocktwits.