How Large Option Traders Are Playing PayPal Following Earnings Dip

Paypal Holdings Inc PYPL shares fell 4.23% after the company reported a third-quarter earnings beat but said its growth would likely slow in the fourth quarter.

A flurry of large PayPal option trades were mixed in nature on Tuesday as investors decide whether or not the PayPal earnings dip is a long-term buying opportunity.

The PayPal Trades: On Tuesday morning, Benzinga Pro subscribers received 24 option alerts related to unusually large trades of PayPal options. Here are a handful of the biggest:

• At 9:44 a.m., a trader bought 544 PayPal call options with a $177.50 strike price expiring on Friday near the ask price at $5. The trade represented a $272,000 bullish bet.
• Less than a minute later, a trader bought 530 PayPal call options with a $177.50 strike price expiring on Friday near the ask price at $4.749. The trade represented a $251,697 bullish bet.
• At 10:26 a.m., a trader sold 516 PayPal call options with a $230 strike price expiring on Jan. 15 at the bid price of $2.101. The trade represented a $108,411 bearish bet.
• At 12:00 p.m, a trader bought 250 PayPal put options with a $187.50 strike price expiring on Nov. 20 above the ask price at $9.155. The trade represented a $228,875 bearish bet.

Of the 24 total large PayPal option trades on Tuesday morning, seven were calls purchased at or near the ask or puts sold at or near the bid, trades typically seen as bullish.

Another 16 trades represented calls sold at or near the bid or puts purchased at or near the ask, trades typically seen as bearish.

One trade was executed near the midpoint of the bid-ask spread, a price typically considered neutral.

Related Link: Here's How Much Investing $1,000 In PayPal's 2015 Spinoff Would Be Worth Today

Why It's Important: Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively small size of the largest PayPal trades by institutional standards, they were likely not institutional hedges.

Disappointing Guidance: By most measures, PayPal had an impressive third quarter from a financial standpoint, beating analyst expectations for earnings and revenue. Yet the negative market reaction on Tuesday suggests care much more about the prospect of slowing revenue growth in the fourth quarter.

PayPal reported third-quarter adjusted EPS of $1.07 on $5.46 billion in revenue. Analysts had been expecting 94 cents and $5.41 billion, respectively. Revenue was up 25% from a year ago, and PayPal added 15.2 million net new accounts in the quarter. PayPal reported 4 billion payment transactions, up 8% from the second quarter.

PayPal also reported 36% growth in total payment volume, beating analyst estimates. However, PayPal guided for fourth-quarter EPS growth of between 17% and 18% and revenue growth of between 20% and 25%, implying significant slowdowns from third-quarter levels.

Prior to Tuesday’s drop, PayPal shares were up more than 70% year-to-date. Much of the selling pressure may simply have to do with investors’ extremely high expectations for the company after such a strong rally.

Benzinga’s Take: For most companies, an earnings and revenue beat and 36% growth in volume would be a great quarter.

However, given PayPal’s big year-to-date rally, traders may have seen the lackluster guidance numbers as enough reason to sell the news.