Update – $PYPL: De-Risking Jan RiskReversal

by CC January 12, 2016 3:13 pm • Commentary• Trade Ideas

On November 13th we detailed a bullish leaning trade in Paypal (PYPL). We wanted to establish a position where we had leverage in the event of a breakout, but offered a reasonable buffer to the downside in the event the stock moved lower in an uncertain market.  We did the in the form of a risk reversal. Here was the original trade and rationale:

*PYPL ($34.65) Buy Jan16 30 / 40 Risk Reversal for a 10 cent credit

-Sell to open 1 Jan16 30 put at .60

-Buy to open 1 Jan16 40 call for .50

Rationale:  The stock is in the midpoint of its 4 month range, I am hesitant for an outright long entry here, but like the idea of establishing a range where I could get long on the downside at the all time lows, but also at what would be a breakout. Think of this trade as a leveraged good till cancel buy order below the market.

Because the stock was at a mid point in the range we didn’t want to put too much premium at risk in the event the stock which has been volatile since its spin out from EBAY in the Summer. And that’s what’s happened. The stock is now lower by almost 2 dollars. But that’s the great thing about the risk reversal trade is we’ve suffered no losses on that move lower.

With the stock now $32.80 the risk reversal is worthless and expires this Friday. We received a 10c credit for the trade initially so that means if there’s any concern about the $30 strike coming into play that can be closed for .05 today.  But because this trade was done for a credit, for those who don’t like the risk of staying short a worthless put in this market, it makes sense to buy the put to close.

Action: PYPL ($32.80) Buy to Close 1 Jan 30 put for .05

We’ll keep our eye on the stock and if it does see $30 during another market sell-off we could look to do the same sort of structure, adjusting the strikes lower, a few months out.