This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.
PayPal (PYPL) Dips After Earnings, Is it a Buy?
After briefly piercing to record highs, PayPal stock declined following its earnings report in the past week. Is the dip a buying opportunity? The following article provides some solid arguments for why it is – Buy the Dip in Paypal Stock Because $100 Is the Next Stop. Also an article recently published on The Motley Fool makes a compelling argument for growth on the back of rising popularity and potential for PayPal’s app Venmo. In the article, the company’s CEO was quoted as saying the P2P payment app could potentially surpass PayPal’s payment system in profitability – The Big News in PayPal’s Fourth-Quarter Update.
Aside from chart patterns, a significant appeal to PYPL is that it touched record highs this month, fully erasing the prior decline. Not only that, it was the first IBD Top 50 listed stock to do so while most have only recovered a part of the fall that took place late in 2018. In this context, it is certainly an outperformer. Support is found at $87.55 as a horizontal level there has previously acted as both support and resistance dating back to June last year. Note that this level was a major barrier in the fourth quarter. On a weekly chart, the 20-week moving average was the equivalent barrier for Q4. It currently falls near $85.50 to provide additional support in the event of further near-term downside. Just above it, the 50-day moving average is found, currently at $86.14.
If you agree there’s further upside ahead for PYPL, consider this trade which is a bet that the stock will continue to advance over the next six weeks, or at least not decline very much.
Buy To Open PYPL 15MAR19 87.5 Puts (PYPL190315P87.5)
Sell To Open PYPL 15MAR19 90 Puts (PYPL190315P90) for a credit of $0.95 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when PYPL was trading near $90. Unless the stock rallies quickly from here, you should be able to get close to this amount.
Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers). Each contract would then yield $92.50 and your broker would charge a $250 maintenance fee, making your investment $157.50 ($250 – $92.50). If PYPL closes at any price above $90 on March 15, both options would expire worthless, and your return on the spread would be 59% (552% annualized).
Changes to Investor’s Business Daily (IBD) Top 50 This Week:
We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run. Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.
As with all investments, you should only make option trades with money that you can truly afford to lose.
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