Paypal Holdings (NASDAQ:PYPL) enters earnings tonight in desperate need of good news. PYPL stock has unraveled amid a broader fall from grace in growth stocks over the past six months.
Higher interest rates and a more hawkish Fed are essentially to blame. Sky-high inflation is forcing their hand, and the tough talk has investors fleeing the types of stocks that did so well following the pandemic.
If that weren’t enough, the recent trend in earnings reports has been terrible.
The last two quarters saw PYPL shares tank following each release. And heading into tonight’s event, it’s hardly a fair fight. The price chart and sentiment are incredibly bearish. Rallies have gotten rejected again and again during the downtrend.
Even if the initial reaction is positive, there’s now a legion of bagholders itching to get out at less of a loss. Unfortunately, this creates a lot of overhead supply that threatens to hamper any recovery attempt.
PYPL Stock Chart
To better understand which price levels matter most, let’s investigate the daily chart. PYPL shares are submerged beneath all major moving averages. The 200-day, 50-day, and 20-day moving averages are all declining. We saw multiple distribution days crop up during the last descent, even as the downtrend’s momentum increased.
The next two resistance zones that matter the most are $180 and $200. $180 was a critical support zone on the way down and is liable to become new resistance. $200 rebuffed multiple rallies last year and is a logical spot for sellers to strike again. It also carries the psychological significance of being a significant round number.
There is one bright spot heading into tonight. Yesterday’s rally notched the first signs of accumulation in weeks. The above-average volume accompanied the rally to show that big buyers returned. At the same time, the entire growth complex staged a solid recovery. For example, the Ark Innovation ETF (NYSEARCA:ARKK) surged 19% over the past three sessions.
Earnings Expectations
The options market provides an idea of market expectations heading into tonight’s report. Based on the pricing early Tuesday, the expected move for PYPL shares is $12 or 6.9%. By adding and subtracting $12 from the current price, we get the expected range: $162.50 to $186.50. Statistically speaking, this is a one standard deviation move, so there’s about a 68% chance PYPL remains in the range.
Options traders have two choices when building trades into the event: bet on volatility or direction. Guessing the direction of the gap is impossible to get right consistently. We’re talking about a binary event without any edge. Since I’m not a fan of betting on coin flips, I’d rather build a volatility-based trade that focuses more on profiting from the size of the move than the direction.
That said, we will have a slight directional component to some of today’s ideas.
3 Trade Choices for PYPL Stock
The recent market volatility has increased PYPL stock options considerably. Thus, we’re going to favor short premium strategies. I’ll provide three ideas, and you can choose based on if you want to have a direction bias into tonight’s number.
Bull Put: Sell the March $145/$135 put spread for $1.05.
Consider this a wager that PYPL will be able to stay above $145.
Bear Call: Sell the March $200/$210 call spread for $1.20
This trade will pay out as long as the stock stays below $200.
Iron Condor: Sell the March $145/$135 bull put and $200/$210 bear call for a net credit of $2.25.
At expiration, you’ll capture the max gain of $2.25 if PYPL sits between $145 and $200. I suggest exiting early once you catch $1 of the potential $2.25 profit to increase your odds of success.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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