from the desk of Dr. Terry F Allen

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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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