PayPal: 3 Trades To Take Advantage Of Recent Dips

Despite the bullish outlook for the coming months, many investors wonder whether now would be an opportune time to enter PYPL stock. We believe the recent decline in price is likely to end soon. Therefore, investors could begin to find value around the current levels.

As we’ve already noted, since the release of Q2 earnings, PayPal shares have lost about 10% of their value, providing a better entry point for buy-and-hold investors. However, there could still be a further pullback toward the $270 level, or even below.

Technical charts show short-term momentum indicators are oversold. Although they could stay oversold for a long time, more than likely PYPL stock will trade sideways in the coming weeks—especially between $260 and $280—until it builds a base around those levels.

At that point, we could possibly expect a new bull leg to start that could take PYPL stock to new highs The long-term technical trend is still up, pointing to a buy .

As part of the short-term sentiment analysis, it would be important to look at the implied volatility levels for PayPal options, which typically shows traders the market's opinion of potential moves in a security. However, it does not forecast the direction of the move.

PYPL’s current implied volatility (IV) is 26.7, which is lower than the 20-day moving average of 31.1. In other words, implied volatility is trending lower. Although the current IV level could change, for now expect the choppiness in PYPL stock to decline.

1. Buy PYPL Stock At Current Levels

Investors who are not concerned with daily moves in price could consider investing in PYPL stock now.

On Aug. 4, as we write, PYPL stock is $272.74.

Such buy-and-hold investors should expect to hold this long position for several months while the stock potentially makes an attempt at the record high of $310.16.

Assuming an investor enters this trade at the current price and exits around $310, the return would be slightly more than 13%.

Investors might also consider placing a stop loss at about 3-5% below their entry point.

2. Protective Put Purchase

Readers who are bullish on PayPal stock, but remain nervous about a further short-term decline, might consider buying a protective put in addition to their stock holdings.

For instance, the trader might buy an out-of-the-money (OTM) put option, like the PYPL Oct.15 250-strike put option.

This option is currently offered at $5.60. Thus, it would cost the trader $560 to own this put option, which expires in slightly over two months (i.e., the maximum risk for the trade). But by buying this option, PayPal investors who also hold the stock would have some protection, especially if the shares or the broader tech sector came under pressure.

This trade would break even at $244.40 on the day of the expiry (excluding brokerage commissions).

Many readers of this column would be familiar with the fact that we regularly cover exchange-traded funds (ETFs) that could be suitable for buy-and-hold investors. Thus, readers who do not want to commit capital to PYPL stock, but would still like to have sizeable exposure to the shares, could consider buying a fund that holds the company as a leading name.

Examples of these ETFs include:

• iShares U.S. Industrials ETF (NYSE:IYJ): the fund is up 15.1% YTD, and PYPL stocks weighting is 6.3% in the ETF;
• ETFMG Prime Mobile Payments ETF (NYSE:IPAY): the fund is up 3.8% YTD, and PYPL stocks weighting is 6.2% in the ETF;
• First Trust Dow Jones Internet Index Fund (NYSE:FDN): the fund is up 14.2% YTD, and PYPL stocks weighting is 5.3% in the ETF.

Bottom Line

PayPal has become one of the most important fintech names, especially in the digital payments space. Its crypto transactions are also growing. Therefore, PYPL shares are likely to offer sizeable gains in the years ahead. Buy-and-hold investors could research the company further with a view to buying the dips.