PayPal is currently below the 21-, 50- and 200-day moving averages. PYPL is also showing low implied volatility, which means options are cheap compared to the recent past.
If PayPal stock continues to struggle, traders might consider a bearish trade known as a bear put spread.
A bear put spread is a debit spread, meaning that we need to pay the premium in order to open the trade.
On PayPal stock, a bear put spread could be set up using the 70 strike as the long put, and the 65 strike as the short put. Both use the June 16 expiration.
Maximum Potential Gain Of $350
This trade would cost around $150 per contract, with a maximum potential gain of $350.
To achieve the maximum profit, this trade would need PayPal stock to drop 9.25% between now and expiration on June 16.
The break-even point for the bear put spread is 68.50, which is calculated as 70 less the $1.50 option premium per contract.
If PYPL stock drops early in the trade, it may be possible to make a profit at slightly higher prices.
At expiration, if PayPal is trading above 70, the entire spread would expire worthless, and the trade would lose 100%, or $150.
For a trade like this, I wouldn't bother with a stop loss. Either the trade works or it doesn't, so I would trade an appropriate position size in case I suffered the full 100% loss. Alternatively, you could set a stop loss at 50% of the premium paid.
Trade Expects PYPL To Remain Weak
Because this is a bearish position, traders who think PayPal stock could move higher from here should not try this trade.
According to the IBD Stock Checkup, PayPal is ranked No. 19 in its industry group and has a Composite Rating of 51, an EPS Rating of 87 and a Relative Strength Rating of 20.
PayPal earnings are set for mid-May, so this trade would have exposure to earnings if held to expiration.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
