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. The actual portfolio at Terry’s Tips where we place the trades we tell you about a couple of days later is now ahead 84% so far in 2018, and that includes our closing out the BABA spread last week at a slight loss when we could have made the max gain if we had waited three more days until expiration. Even we make bad trades once in a while (although we still believe we made the prudent move – no one could have predicted that BABA would soar $11 in the last three days before expiration).
Will Paypal (PYPL) Continue Its Upward Momentum?
Several articles have recently been published on the positive outlook for PYPL. Here are two of them – Paypal Holdings Stock Is Itching for a Breakout and BMO Capital Markets Boosts Paypal Price Target to $89.00.
As the above technical article has mentioned, the 20-period moving average on a weekly chart held Paypal stock higher following the earnings-inspired correction in early February. PYPL has since climbed back above the same moving average on a daily chart, which has held declines in the month thus far. The stock has also breached above the psychological $80 price point which had held prices lower in late February.
If you agree there’s further upside ahead for Paypal, 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 20APR18 77.5 Puts (PYPL180420P77.5)
Sell To Open PYPL 20APR18 80 Puts (PYPL180420P80) for a credit of $0.83 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when PYPL was trading near $81. Unless the stock rallies quickly from here, you should be able to get close to this amount.
If you use our favorite broker for this trade, tastyworks, your commission on this trade will only be $1 per opening contract ($2 per spread) (and there is no commission on closing trades, only the $.10 clearing fee). Each contract would then yield $81 and your broker would charge a $250 maintenance fee, making your investment $169 ($250 – $81). If PYPL closes at any price above $80.00 on April 20, both options would expire worthless, and your return on the spread would be 48% (449% 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.