PayPal Stock Is Down 61%; This Bearish Option Strategy Plays The Downside | IBD

TL;DR

PayPal, the payments company and Venmo parent company, is experiencing a decline in stock and financial performance, making it a suitable candidate for a bear call spread option strategy.

Transcript

[Applause] hey option traders for today's trade we're looking at a bearish option play in payments company and venmo parent company paypal taking a look on market smith the stock has been on the decline since july of last year that's when the bullish uptrend stopped and shares began trading sideways then in september the stock moved below its 10-we... Read More

Key Insights

• 📈 PayPal's stock has been declining since July of last year, indicating a bearish trend.
• ❓ The company's financial performance, including earnings per share and sales growth, has been decelerating.
• 📽️ For 2022, PayPal's earnings are projected to decrease by 16% compared to the previous year.
• 🧔 A bear call spread is a suitable option strategy for investors who expect PayPal's stock price to fall.
• 😘 The strategy involves buying a call with a higher strike price and selling a call with a lower strike price simultaneously.
• 🧔 The maximum gain in a bear call spread is determined by the premium received, while the maximum loss is calculated by subtracting the premium from the spread width.
• 😫 It is crucial to set rules for taking profits and managing losses in a bear call spread.

Questions & Answers

Q: What is a bear call spread and why is it suitable for a bearish assumption?

A bear call spread is an option strategy where an investor buys a call with a higher strike price and sells a call with a lower strike price simultaneously. It is suitable for a bearish assumption as it allows the investor to collect a premium up front and profit if the stock price falls.

Q: How does the maximum gain, loss, and break-even points work in a bear call spread?

In a bear call spread, the maximum gain is determined by the premium received, multiplied by the number of shares represented by each option contract. The maximum loss is calculated by subtracting the premium received from the spread width. The break-even point is the short call strike plus the premium received.

Q: What are some rules for taking profits and managing losses in a bear call spread?

One rule for taking profits is to consider selling if the trade achieves a profit equal to 50% of the premium received, especially if it occurs in the first half of the trade. To manage losses, it is advised not to allow the loss to exceed 1.5 to 2 times the premium received. Another strategy is to roll a losing trade out in time to the next expiration, aiming to receive a net credit for the extra risk.

Q: What is the suggested bear call spread trade for PayPal?

The suggested bear call spread trade for PayPal involves selling the August 19th expiration 75 call and buying the 80 call. This generates approximately $185 in premium while having a maximum risk of $315. The trade will achieve maximum profit if PayPal's stock closes below $75 on August 19th.

Summary & Key Takeaways

• PayPal's stock has been declining since July of last year, with a weakness indicator in September when it fell below its 10-week moving average.

• Both earnings per share and sales growth have been decelerating, with a significant decline compared to the previous year.

• For 2022, earnings are expected to decrease by 16% from the previous year. This analysis suggests a bearish assumption for PayPal.