PayPal Holdings Inc (NASDAQ:PYPL) : The Exact Trigger that Indicates Volatility
Date Published: 2019-01-07
DisclaimerThe results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
PrefaceWe looked at a bullish trigger in Amazon, a bearish trigger in Nvidia, and today we look at a volatility trigger in PayPal Holdings Inc (NASDAQ:PYPL).
Simply owning puts and calls together, like a straddle or a strangle, generally doesn't work. How wonderful would option trading be if we could just buy calls and puts and grow wealth? The need has arisen -- an empirical and structured trigger -- to find an indicator when a large stock move is coming so owning a strangle has a higher probability of succeeding.
There is such a technical condition, and we will review it, right now.
Here is a quick 3 minute video that demonstrates the back-test in Amazon, Adobe, and Apple:
The Short-term Option Volatility Trade in PayPal Holdings IncIt's time to take advantage of volatility. Fear, uncertainty, doubt, unclear news headlines -- these are all trade-able events.
We will examine the outcome of going long a short-term out-of-the-money (40 delta) strangle (buying an out of the money call and buying an out of the money put), in options that are the closest to 14-days from expiration. But we follow three rules:
* Never Trade Earnings
Let's not worry about stock direction or earnings, let's try to find a back-test that benefits from volatility. Here it is, first, we enter the long strangle.
* Use a technical trigger to start the trade, specifically:
Wait until the day that the stock price crosses below the 200-day moving average and the stock price is below the 10-day moving average. Here is a nice simple image of the technical requirement:
As of this writing, January 7th 2019, the trigger is not yet satisfied.
But, in the pivot point chart, below, we can see that a hard down day in the stock would push it below the 200-day moving average and the 10-day. That means we need to put a pin in this and get an alert when it does trigger. This is one to save as we will soon see in the historical results.
* Finally, we set a very specific type of limit:
* Use a 20% limit
* Close the trade after 10 days, if the limit has not been hit.
At the end of each day, the back-tester checks to see if the long strangle is up 20%. If it is, it closes the position. If after 10-days the limit has not been hit, the strangle is closed so not to suffer total time decay.
RESULTSHere are the results over the last five-years in PayPal Holdings Inc:
The mechanics of the TradeMachine® Stock Option Backtester are that it uses end of day prices for every back-test entry and exit (every trigger).
Setting ExpectationsWhile this strategy had an overall return of 96.6%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 27.9%.
Checking the Moving AverageYou can check to see the moment a stock dips below the 200-day MA for PYPL on the Pivot Points tab on www.CMLviz.com.
Back-testing More Time Periods in PayPal Holdings IncNow we can look at just the last year as well:
➡ The average percent return over the last year per trade was 33.2%.
WHAT HAPPENEDTrade Machine gives you the capacity to trade beyond luck.
Tap here to see it for yourself
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.