PayPal (PYPL) reported Q2 2023 results on Wednesday after the markets closed. While its earnings beat analyst estimates, investors worried about falling margins. As a result, its shares are off by more than 11% in Thursday’s trading.
The payment solutions company’s volume halfway through the day is double its 30-day average of 14.5 million shares. Its options volume is 383,692, also more than double its 30-day average.
However, it is PayPal’s unusual options activity that is really perplexing, sending mixed signals about whether investors feel its shares are a buy or a sell over the long haul.
You’ve Got a Lot of Options (No pun intended)
As I look at PayPal’s unusual options activity, I see 17 puts and 17 calls, split evenly between the two. However, the data on PayPal options says the put/call volume ratio is 0.53, which means investors are buying more call contracts than puts. The same argument applies to the put/call OI ratio.
These are both bullish signs. Down 11% on the day, investors look to be bargain-hunting.
As I said, there are 34 PYPL options with volume of 1.25x open interest or higher. Let’s first take a look at the put options.
The top put in terms of the Vol/OI ratio is the Aug. 11 $64 put with a $0.83 bid. Its Vol/OI is 13.96x. If you were to sell this put, your income of $83 would be an annualized yield of 59.3%, based on a $64.71 share price.
I’ll take that every day and twice on Sunday.
The top put for premium income is the Dec. 15 $60 strike with a bid price of $3.10. It has a Vol/OI ratio of 1.87x. With 134 days to expiration, it provides an annualized yield of 13.1%, significantly less than the Aug. 11 $64 put.
The question for those bullish about PayPal’s long-term future: What is a fair and reasonable price to pay for a 2-3 year hold or longer?
Over the past five years, it has traded above $60 almost 100% of the time, dropping below this level for just a few days in May. However, since early 2022, it’s traded in a tight range between $70 and $100. The last time it did that was in 2017 and 2018. It’s been a while.
The sticking point appears to be whether PYPL stock is bottoming with today’s double-digit decline or is the beginning of another leg down to levels not seen since 2016 or earlier.
What About the Calls?
The call volume is much higher than the put volume, which is very bullish.
The top call regarding the Vol/OI ratio is the Aug. 11 $65 strike with a $1.35 ask. Its Vol/OI is 22.03x. The volume as I write this is 3,524. By comparison, the put with the top Vol/OI ratio has a volume of 2,599, 26% less than the call.
The delta on this call is 0.48784. You'll double your money if the share price moves up $2.77 to $67.48. However, if you exercise your right to buy the shares at $65, your net cost would be $66.35, about $1.13 less than where the shares could be trading in eight days.
So, you should ask yourself whether you think $66.35 is a good entry point to buy PayPal stock.
Given its history of trading above $70, it’s not the worst price you could pay, but I think you can do better selling puts than buying calls in this situation.
The Aug. 11 $64 put with a $0.83 bid has an excellent yield. Should the share price not fall to $64 in the next eight days, the consolation prize is a 59.3% annualized return. Further, with the share price recovering some of the losses from this morning, it might be unrealistic to expect its shares to fall to $64 by a week Friday.
However, as the company closes in on the search for a CEO to replace Dan Schulman, the reaction to an official announcement is likely to push its share price back to $70.
“We are in the very final stages of the process with several outstanding candidates, all of whom are highly qualified and excited to lead PayPal as we go into our next chapter of growth,” Schulman said in its Q2 2023 conference call.
I don’t have a strong feeling about PayPal in either direction. That makes choosing between a put and a call in this instance very difficult.
It’s hard to know where PYPL stock goes next. As I said, the company’s unusual options activity is sending mixed signals.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
