PayPal (PYPL) hit resistance at the declining 50 and 200-day moving averages and closed down nearly 2% yesterday.
The Barchart Technical Opinion rating is a 56% Sell with an average short-term outlook on maintaining the current direction.
Today, we’re going to look at a Bear Call spread trade.
A Bear Call spread is a bearish trade that also can benefit from a drop in implied volatility.
The maximum profit for a Bear Call spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
PYPL BEAR CALL SPREAD
To create a Bear Call spread, we sell an out-of-the-money call and then by another call further out-of-the-money.
Selling the August 16 call with a strike price of $65 and buying the $70 call would create a Bear Call spread.
This spread was trading yesterday for around $0.90. That means a trader selling this spread would receive $90 in option premium and would have a maximum risk of $410.
That represents a 22% return on risk between now and August 16 if PYPL stock remains below $65.
If PYPL stock closes above $70 on the expiration date the trade loses the full $410.
The breakeven point for the Bear Call spread is $65.90 which is calculated as $60 plus the $0.90 option premium per contract.
COMPANY DETAILS
PayPal is one of the largest online payment solutions providers that enables it to offer smooth and secure transaction facility to both customers and merchants.
The company's peer-to-peer payment service, Venmo, is the key catalyst behind the solid growth in its total payment volume.
The company offers domestic and international person-to-person payment facilities with the help of PayPal and Xoom products.
PayPal allows customers to send payments in more than 200 markets globally.
It has connections with financial service providers worldwide. Further, the company supports withdrawal of funds from bank accounts in 56 currencies and holding balances in PayPal accounts in 25 currencies.
Additionally, transfer of funds supports more than 100 currencies globally.Additionally, this San Jose, CA-based company is gaining from strategic acquisitions including Hyperwallet, Braintree and iZettle that are helping it in delivering better payment experience.
PayPal is showing an IV Percentile of 77% and an IV Rank of 71.40%.
PayPal is due to report earnings on July 30th, so this trade would have earnings risk if held to expiration.
Conclusion And Risk Management
One way to set a stop loss for a Bear Call spread is based on the premium received. In this case, we received $90, so we could set a stop loss equal to the premium received, or a loss of around $90.
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.
On the date of publication, Gavin McMaster 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.
