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Make a Friend out of PayPal (PYPL)

On
Wednesday, PYPL blew past earnings estimates, as profits jumped 84% from a year
earlier. The EPS of $1.22 easily beat the consensus analyst estimate of $1.02.
Revenue was up 29%, also beating expectations. For good measure, the company
upped its guidance for 2021. The news was greeted by several target price
updates. The average price target is now above $317, which is 25% above
Friday’s close.

Although
the stock is up about 2% since earnings, it hasn’t blown anyone’s hair back so
far in 2021, as the shares are up only 8%. In fact, they’ve been flat for 3-1/2
months. But a longer-term view shows the stock’s monster uptrend since the
March 2020 bottom – it’s more than tripled – is alive and well. The rising
20-week moving average has guided the rally nearly perfectly, allowing just
three weekly closes below it during the past year. This trendline is sitting
near 255, so we’re looking at a put credit spread with the short put sitting
below the 20-week.

If
you agree that PYPL will stay above its 20-week moving average, consider the
following trade that relies on the stock remaining above $250 through
expiration in six weeks.

Buy
to Open PYPL 18Jun21 240 Put (PYPL210618P240)

Sell to Open PYPL
18Jun21 250 Put (PYPL210618P250) for a credit of $3.60 (selling a vertical)

This
credit is $0.05 less than the mid-point
of the option spread when PYPL was trading at $253. Unless the stock rallies
quickly from here, you should be able to get close to this amount.

Your
commission on this trade will be only $1.30 per spread.  Each spread would then yield $358.70. This
trade reduces your buying power by $1,000 and makes your net investment $641.30
($1000 – $358.70).  If PYPL closes above
$250 on June 18, both options will expire worthless
and your return on the spread would be 56% ($358.70 / $641.30).

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