PayPal: Diagonal Debit Spread Could Offset Short-Term Price Volatility

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Investors in the fintech giant Pay Pal (NASDAQ 🙂 have seen the stock’s value drop 18% year-to-date. By comparison, the index, of which PYPL stock is a member, has returned around 29% year-to-date.

On July 26, PYPL shares topped $ 310 to hit a record high. However, the stock is currently hovering around the $ 192.20 level, a 38% drop from its peak. The stock’s 52-week range was $ 179.15 to $ 310.16 and the market cap stands at $ 225.6 billion.

Recent metrics highlight:

“The transaction value of the digital payments market was US $ 5.44 trillion in 2020, and is expected to reach US $ 11.29 trillion by 2026.”

And PayPal is one of the biggest names in digital payment services. For example, more than 70% e-commerce sites in the United States have the PayPal button as a payment option.

The platform released Q3 finances November 8. As of, he had 416 million active accounts with a total payment volume (TPV) of $ 310 billion. There were 4.9 billion payment transactions, an average of 44 payment transactions per active account.

Net revenue was $ 6.18 billion, an increase of 13% year-on-year. Non-GAAP EPS of $ 1.11 was up 4%.

The 20% growth in free cash flow of $ 1.29 billion was impressive. But, for the fourth quarter, the outlook was weaker than analysts’ estimates. Management expects to generate between $ 6.85 billion and $ 6.95 billion in net revenues in the fourth quarter.

Prior to the release of quarterly results, PYPL stock was around $ 230. On December 1, it fell below $ 180. Since then, buyers have come in and pushed it to $ 192.20.

What to expect from PYPL stock

Among the 48 analysts surveyed via Investing.com, the PayPal share has an “outperformance” rating.

Consensus estimates from analysts surveyed by Investing.com.
Consensus estimates from analysts surveyed by Investing.com.

Chart: Investing.com

Analysts have a 12-month median price target of $ 271.58 for the stock, which implies an increase of more than 41% from current levels. The 12-month price range is currently between $ 39 and $ 366.

On the other hand, according to a number of valuation models, such as those that could take into account P / E, P / B or P / S multiples or the DuPont analysis, the average fair value of the PYPL share , via InvestingPro stands at $ 214.38, implying an upside potential of 11%.

Fair value courtesy of InvestingPro.
Fair value courtesy of InvestingPro.

Chart: InvestingPro

Meanwhile, if we look at the businesss financial health determined by ranking over 100 factors against its IT peers, we find that in terms of growth and earnings health, PayPal scores 4 out of 5 (best score) . Its overall performance is rated Well.”

The P / E, P / B and P / S ratios for PYPL stocks are 45.7x, 10.2x and 9.2x. In comparison, these metrics for peers stand at 45.7x, 10.2x, and 9.2x. In other words, despite the recent price drop, PYPL stock still looks foamy.

We can also take a closer look at comparable metrics for several other fintech names, including To block (NYSE :), Fiserv (NASDAQ :), MasterCard (NYSE :), Paysafe (NYSE :), SoFi Technologies. (NASDAQ 🙂 and Visa (NYSE :). They are:

Ratios of FinTech companies.

These metrics show that valuations in the high-growth fintech segment vary. Therefore, potential investors should do their due diligence to find the best stock suitable for their objectives.

Finally, those who also pay attention to technical charts might be interested to know that despite the recent price decline, several of PYPL’s medium-term stocks indicators always warn investors.

In the coming weeks, we expect PayPal shares to potentially trade in a range between $ 180 and $ 200 and form a base from which a new stage can begin.

Therefore, investors who are not concerned about short-term fluctuations in PYPL shares might consider buying them around these levels.

Those who are long-term bullish on PayPal stocks, but believe the short-term swings may continue, could use options. For example, they could establish a diagonal debit spread on PYPL stocks using “Long-Term Equity Anticipation Securities” (LEAPS) options. We’ve covered many examples before (and).

The strategy, also known as “Covered call of the poor” or “Covered call of the poor”, has options. This strategy is not appropriate for most retail investors, therefore, they should consider the following discussion for informational purposes rather than a trade recommendation.

A diagonal flow spread on PYPL shares

Buying 100 PayPal shares would currently cost around $ 19,200 based on the intraday share price on Tuesday, a hefty investment for many people.

But in this strategy, a trader would first buy a “longer term” call with a lower strike price. At the same time, the trader would sell a “shorter term” call with a higher strike price, creating a long diagonal spread.

In other words, the two call options for the underlying stock (i.e., PYPL in this case) have different strike prices and expiration dates. The trader takes a long option and sells another option to create a diagonal spread.

In this LEAPS covered buying strategy, profit potential and risk are limited. The trader establishes the position for a net debit (or cost). The net flow represents the maximum loss.

Most traders going into such a strategy would be slightly bullish on the underlying security, here PayPal.

Instead of buying 100 shares of PayPal, the trader would buy a high-value LEAPS call option where this LEAPS call acts as a substitute for owning PayPal stock.

At the time of writing, PYPL was $ 192.20 (Editor’s note: it ended the day at $ 190.10, but we’ll stick to the author’s noon calculations throughout this article. ).

For the first step of this strategy, the trader can buy a deep in the money (ITM) LEAPS call, such as the January 19, 2024 PYPL call option, 150 strikes. This option is currently offered at $ 65.75 (midpoint of the current bid and ask spread). In other words, it would cost the trader $ 6,575 instead of $ 19,198 to own this call option which expires in more than two years.

The delta for this option is approximately 0.80. Delta indicates how much the price of an option should move based on a $ 1 change in the underlying security.

In this example, if PayPal stock goes up to $ 193.20, the current option price of $ 65.75 should rise by about 80 cents, based on a delta of 0.80. However, the actual change may be slightly more or less depending on several other factors that are beyond the scope of this article.

Thus, the delta of an option increases as one goes deeper into the money. Traders would use deep ITM LEAPS strikes because as the delta approaches 1, the price movements of a LEAPS option start to mirror that of the underlying stock. Simply put, a delta of 0.80 would be equivalent to owning 80 shares of PYPL in this example (as opposed to 100 in a normal covered call).

For the second step of this strategy, the trader sells a short term out-of-the-money (OTM) call, such as the PYPL call option of February 18, 2022 at 195 strikes. The current premium for this option is $ 11.75. In other words, the options seller would receive $ 1,175, excluding trading commissions.

There are two expiration dates in the strategy, which makes it quite difficult to give an exact formula for a breakeven point for trading.

Maximum profit potential

The maximum potential is realized if the share price is equal to the exercise price of the short call on the expiration date of the short call.

In other words, the trader wants the PYPL share price to stay as close as possible to the short option strike price (i.e. $ 195 here) at expiration (the February 18, 2022), without exceeding it.

In our example, the maximum return, in theory, would be around $ 1,267 at a price of $ 195.00 at expiration, excluding commissions and trading fees. We arrived at this value using a profit and loss calculator.

Without the use of such a calculator, we could also come up with an approximate dollar value. We’ll take a look:

The options seller (ie the trader) received $ 1,175 for the option written.

Meanwhile, the underlying PYPL stock fell from $ 192.20 to $ 195. This is a difference of $ 2.80 for 1 share of PYPL or $ 280 for 100 shares.

Since the delta of the LEAPS long option is taken at 0.8, the value of the long option will theoretically increase by $ 280 X 0.8 = $ 224.0 (however, in practice it may be more or less).

The total of $ 1,175 and $ 224 comes to $ 1,399. While it’s not the same as $ 1,267, we can consider it a good approximate value.

Of course, if the strike price for our long option had been different (i.e. not $ 150.00), its delta would have been different as well. Then we need to use this delta value to come up with the approximate end value of profit or loss.

Therefore, by not initially investing $ 19,200 in 100 shares of PYPL, the potential return of the trader is maximized.

Ideally, the trader hopes that the short call will expire out of the money (worthless). Then the trader can sell one call after another, until the long LEAPS call expires in about two years.

Finally, it should be noted that a diagonal flow deviation requires regular management of the positions.


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