PayPal Stock: Buy the Dip before Earnings

In today’s trading session, PayPal Holdings (PYPL) is trading at $95.50, down 1.91% from the previous session at the moment of writing. PayPal is slated to report its third-quarter earnings today after the market closes.

Currently, Wall Street analysts expect PayPal’s earnings to rise 11.73% in the third quarter to $0.60 per share. Following this trend, analysts forecast that PayPal’s Q3 revenue could climb to $4.35 billion. This estimate implies an increase of 18.17% on a year-over-year basis.

However, options traders are actively buying the dip during today’s trading session. So, let’s consider PYPL’s technical chart and interpret recent options activity to see what investors can expect from PayPal stock going forward. 

Technical outlook for PayPal stock

Looking at the daily chart, you can see what’s going on with PayPal stock. Currently, the stock has held firm at its technical support around the price of $95.00. It’s also trading 21% off the 52-week high reached in July.

In the near term, PYPL stock may rally to the technical resistance level of $100.00 if investors view the Q3 earnings as positive. A break of this level would likely send the stock close to the next resistance level, around $105.00. However, the failure of the price to break above $100.00 would lock the equity in the $95–$100 range.

Also, the RSI index is floating close to the oversold area. That factor may provide additional support in terms of a plausible trend reversal. 

Bullish options bets on PYPL stock despite sell-off

The options, which expire on November 15, saw increased call buying in today’s trading session. According to Barchart.com, the open interest for the $112.00 calls rose by 7,401 contracts to a total of 7,411 open contracts. A buyer of those calls would need the stock to rise to $112.11 by the expiration date. That’s a gain of about 17% from the current price of PYPL stock.

Also, the open interest levels for the January 17 $97.50 calls doubled early today. The open contracts rose by 2,509 contracts to about 4,600 (source: Barchart.com). It’s a large, bullish bet, given the transaction’s total dollar value of about $2 million. A buyer of the calls would need the stock to rise to $101.9 by the expiration date, a gain of about 7% from PYPL stock’s current price.

Finally, this morning, the open interest for the $110.00 calls that expire on January 17, 2020, rose by 2,637 contracts. This rise brought the total to 15,894 open contracts. A buyer of the calls would need the stock rise to $110.97 by the expiration date to break even.

Options traders expect a 6% move in PayPal stock

Looking at the November 1 options, I see a bid/ask for the $96.00 call option of $2.63/$2.67. Also, I see a bid/ask for the $96.00 put option of $3.05/$3.15. Keep in mind that the options strike closest to the PYPL price of $95.50 at the moment of writing. We can calculate the expected price move using the mid-prices of these options:

3.10 (96.00 Put) + 2.65 (96.00 Call) = 5.75/95.50 = 6%

The options imply, as you can see, that PYPL stock could rise or fall by ~6% by the November expirations from the $96.00 strike price. This estimation utilizes the long straddle strategy. My assessment would place PayPal stock in a trading range of $89.77–$101.23 by the expiration date.

Moreover, the calls at the $96.00 strike price outweigh the put options about 2:1 with 471 open calls to 250 open puts. A buyer of the $96.00 strike price calls would need the stock to rise to around $98.67 by the expiration date to break even. This imbalance suggests rather more bullish than bearish market sentiment for PayPal stock.

Analysts’ coverage and target price

Wall Street analysts have mostly upgraded PYPL over the last six months. The consensus price target is $123.07 for PayPal stock ahead of earnings today, representing 18.39% upside.

See MarketBeat for a detailed breakdown. According to TipRanks, PYPL is a “strong buy” with an average price target of $128.44, which represents 33.72% upside. 

For more technical analysis ahead of today’s big earnings announcements, check out Why Microsoft Stock Could Rise after Earnings.