Today we have entered into 1×2 put spreads on PayPal (PYPL), which involve buying one higher-strike put and selling two lower-strike puts. This strategy allows us to potentially acquire additional shares at lower prices if PYPL continues to decline, effectively using the options market to express a bullish long-term outlook. If the stock stabilizes, moves sideways, or rises, the maximum risk is generally limited to the premium paid for the spread. However, because one of the lower-strike puts is uncovered (naked), significant downside movement below the short strike can create additional risk. While it is unlikely that PYPL would decline below our estimated cost basis of $30.70 per share, this strategy does require a willingness and the capital to purchase 100 shares of stock for each spread traded if assignment occurs. The trade breakdown is shown below.
Buy to open: PYPL July 17th (monthly) 40.00 strike put (ratio of 1)
Sell to open: PYPL July 17th (monthly) 35.00 strike put (ratio of 2)
Debit: 0.75
Max Risk = owning shares of PYPL at a cost basis of 30.75/share (huge discount)
Probable Risk = 0.75 or $75.00 per spread traded
Max Reward = 4.25 or $425.00 per spread