PayPal Tanks; Earnings Report Stuns Investors; Stock Still Looks Expensive

Cautiously trade stocks, covered calls options and cash secured puts options with me for a year. Then you should have a nice total returns trading business.

By Donald E. L. Johnson

Cautious Speculator

• PYPL shows risk of owning stock and puts and calls positions before earnings reports.

• This is one of my losers. I’m diversified and plan to work my way out of this hole using puts and calls options. Whether and when the stock will bounce back is unpredictable.

• To fix their trades, PYPL owners may buy more shares, sell puts, sell covered calls, sell both puts and covered calls or buy PYPL leaps.

• PYPL January 2023 leaps options are very active and liquid

Even “Cautious Speculators’ can get caught in bad trades. Like having PayPal  (PYPL) put to me at an average price of $182 per share. At the moment it is at $131.30.

This newsletter is about picking good trades and fixing bad ones. Who suggested this trade doesn’t matter. I did it. It’s mine. But my stock and options portfolios are diversified and mostly in cash. Because I trade covered calls and cash secured puts (CSP), I’m doing better than the benchmarks this year.

What’s the strategy?

I’m waiting a few days to decide what to do about PYPL. On CNBC, panelists agree that the company is in a good business. But they don’t think it is run very well.

PYPL owners can take their losses and move on. In other words, do your 2022 tax loss selling early.

They could take smaller profits than they anticipated or thought they had. Or they could hold the stock and hope for a bounce back or rally over the next few quarters or years.

Some will buy more shares and average down the per share price cost of their investment.

Those with enough cash to fund selling cash secured puts could sell puts and calls to work their ways out of the deep hole.

A cautious trade would be to sell PYPL 3.18.22 (44 days) $95 strike (delta -.07) puts for about $0.92 per share, or about 5.93% annualized. They could one put for every 100 shares they own, or they could do 200 or 300 or whatever it takes to get their net debits back to breakeven or an acceptable loss.

Selling covered calls is pretty much the same trade as selling puts, which is a bullish trade.

After waiting for a few days to see what the new price level for PYPL probably will be for awhile, owners of the stock could sell PYPL 2.18.22 (16 days) $157 (delta .08) covered calls for about $0.61 per share, or about 10% annualized.

More experienced covered calls traders probably will sell weekly covered calls closer to at the money strikes, but at low enough deltas so that the stock won’t be called before it reaches an owner’s target price. That’s what I plan to do.

Aggressive traders may decide to hold PYPL while selling both covered calls and CSPs at low deltas to minimize the risk of having their options exercised while they generate weekly and monthly options premium income.

PYPL looks expensive

PYPL could drop another $10 to $30 in the next few days with an expensive P/FCF ratio of about 31 and a PE of about 31. P/FCF, the most important valuation ratio, could change after the latest earnings report data becomes available on StockRover.com and elsewhere.

If we’re lucky and the economic outlook brightens, after a few days, PYPL could rally back to $140 to $150. On StockRover.com, PYPL’s fair value estimate (FVE) is $143.31. Sell side brokerage firms’ analysts who have posted price targets had an average target of $281 before the earnings report. That target price is likely to go down in the next few days.

On StockCharts.com, PYPL’s point and figure chart’s bearish target price objective is about $84, or near its three-year low of $82.07. It hit that low in March, 2020. That PnF target is the ultimate support level that is estimated by a computer model with variables such as buy and sell volume and price changes.

What are the options markets suggesting?

PYPL 1.20.23 $130 calls are at about $23.60 bid, $23.85 ask.

If a speculator bought PYLP 1.20.23 (352 days) $130 strike (delta .60) calls for $23.85, the breakeven price would be $153.85. The delta suggests that there is a 60% chance, give or take, that PYPL will get back to about $153 by early next year. The PYPL 1.20.23 $185 (delta .26) calls are quoted at $6.70 bid, $7.05 ask. And those leaps calls are very active and liquid.

Question: Will you hold PYPL, buy, sell or sell T puts and calls?

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Beware

Like all investing, trading stocks and options is risky. If you can’t sleep with market risks, you might want to let someone else do your trading. Consider an option trading ETF like XYLD, which I own. I also trade its calls and puts. I’m an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. It is not advice. The data presented looked accurate at publication time except for intra-day fluctuations, but I can’t guarantee the accuracy. Traders should do their due diligence. I reserve the right to trade any of the listed stocks at any time. I own PYPL and have options  on the stock.

@realDonJohnson