Options Traders Aren't Buying PayPal's Hot Start to 2019

Put open interest among short-term contracts is unusually high on PayPal

Mar 18, 2019 at 12:40 PM
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Payment processors are in focus today on Wall Street following Fidelity's $35 billion buyout deal for Worldpay (WP). Sector peer PayPal Holdings Inc (NASDAQ:PYPL) earlier hit a record high of $101.83, but has since pulled back to trade at $99.47, as it tests the significant round-number $100 level. Despite PYPL stock's 18.5% advance so far in 2019, many options traders have been placing bearish bets.

We can start with the security's Schaeffer's put/call open interest ratio (SOIR) of 1.00, ranking just 1 percentage point from a 12-month peak. This reading shows that the even split between call and put open interest among contracts expiring within three months is rare, as typically call open interest has the significant advantage. From this we could infer that speculators are taking a cautious stance on PayPal.

But that doesn't tell the full story, because even on the call side there's been skepticism. During the past two weeks, the May 110 call has seen the largest increase in open interest, and the April 100 call was a close second. The majority of these contracts were actually sold to open, showing that traders expect PYPL shares to hold below the strikes in the weeks ahead.

Judging by the equity's Schaeffer's Volatility Index (SVI), it's a much better time to buy premium than to sell it. The current reading of 21% ranks in the 1st annual percentile, showing very muted volatility expectations for near-term options.

What's more, Schaeffer's Senior Quantitative Analyst Rocky White points out that there have been six other times since 2008 when PayPal has had an SVI in the bottom 20% of its annual range while the stock was near 52-week highs, and the shares have posted positive monthly gains after four of those signals. The average gain has been 4.4%. If the stock does extend its long-term uptrend, a reversal of sentiment among the options crowd could turn out to be a tailwind.

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