The S&P 500 is in correction mode with the recommended stock market exposure sitting at 0%-20%. One way to reduce your exposure is to selectively add some bearish option trades to your portfolio. And a possible stock for that might be PayPal (PYPL), which has been in a downtrend trend since late January and shows declining relative strength.

The stock is currently below its 21-day exponential, 50-day and 200-day moving averages. Both the 21-day and 50-day are trending downward. If PayPal continues to move lower, a bear put spread would be the best way to trade it.

A bear put spread is a debit spread, meaning investors need to pay the premium in order to open the trade. On PayPal, traders can set up a bear put spread using the 65 strike as the long put and the 60 strike as the short put for the May 16 expiration.

This trade would cost around $165 per contract with a maximum potential gain of $335. To achieve the maximum profit, this trade would need PayPal stock to drop about a further 11% between now and expiration on May 16.

Breakeven Point At 63.35

The breakeven point for the bear put spread stands at 63.35, calculated as 65 less the $1.65 option premium per contract. If PayPal stock drops early in the trade it may be possible to make a profit at slightly higher prices.

At expiration, if PayPal stock is trading above 65, the entire spread would end up being worthless. Thus, the trade loses 100% or $165. A stop loss could be set at 50% of the premium paid, for a deficit of around $82.

This bearish position means traders who see PayPal stock moving higher should not enter this trade. 

Also, the trade starts with a delta of -12. That means the exposure is roughly equivalent to being short 12 shares of PayPal stock. This long straddle trade worked well on Advanced Micro Devices (AMD) and can be closed for a healthy profit.

PayPal Stock Rankings

According to the IBD Stock Checkup, PayPal stock ranks No. 17 in its group. Further, it has a Composite Rating of 63, an EPS Rating of 78 and a Relative Strength Rating of 40.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ

YOU MIGHT ALSO LIKE:

Marvell Technology Stock Today: Why A Cash-Secured Put Lowers Your Cost Basis

Iron Condor For Arista Networks Stock Has Wide Profit Range

IBD Live: A New Tool For Daily Stock Market Analysis

This Option Trade Profits If The Worst Is Over For Trade Desk Stock

Nike Stock Today: Trade This Bear Call Spread Today For A Potential $115 Profit