Bearish eBay (NASDAQ: EBAY) options play funds stock purchase

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Options action in Internet auction house eBay Inc. (NASDAQ: EBAY ) during midday trading suggests an investor sold a hefty number of later-dated calls to protect against a potential slide in the stock.

EBAY shares are currently down seven cents to $26.98 without any news to catalyze the slight drop so far on the day. The company reached a 52-week high of $28.37 on March 25, but the stock has since sold off roughly 5%. EBAY is due to announce earnings on April 21 after the market closes, and analysts estimate earnings of 41 cents a share. Judging from the call volume that crossed the tape a few hours ago, one investor could  be betting that EBAY shares will not climb much higher during the next three months.

At 10:51 a.m. EST, 7,000 out-of-the-money ( OTM ) July 29 calls changed hands for the bid price of 93 cents per contract, indicating investors likely sold these options on a bet that EBAY stock could stay below $29.93 (the breakeven price) prior to July options expiration. These calls are home to current open interest of 1,100 contracts, which means investors traded the majority of the options to open. Investors could make a maximum profit of 93 cents on this short call position if EBAY shares hit a ceiling at the breakeven price. This strategy accounts for a potential 10% rally in the stock before investors begin to lose money (maximum losses are theoretically unlimited if EBAY shares climb significantly). While this options action suggests investors are bearish on EBAY, a close look at time and sales suggests investors sold the calls to finance a stock purchase. This means the investor is long EBAY, but protected the long stock position by selling upside calls. Implied volatility of the July 29 calls is 31% compared to the stock's 30-day historical volatility of 23%.

You can easily build a profit/loss graph of this short call position coupled with long stock by opening a free virtual trading account .By doing so, you gain access to several tools essential to stock and option trading that I use every day.

Options action in Internet auction house eBay Inc. ( EBAY ) during midday trading suggests an investor sold a hefty number of later-dated calls to protect against a potential slide in the stock.

EBAY shares are currently down seven cents to $26.98 without any news to catalyze the slight drop so far on the day. The company reached a 52-week high of $28.37 on March 25, but the stock has since sold off roughly 5%. EBAY is due to announce earnings on April 21 after the market closes, and analysts estimate earnings of 41 cents a share. Judging from the call volume that crossed the tape a few hours ago, one investor could  be betting that EBAY shares will not climb much higher during the next three months.

At 10:51 a.m. EST, 7,000 out-of-the-money ( OTM ) July 29 calls changed hands for the bid price of 93 cents per contract, indicating investors likely sold these options on a bet that EBAY stock could stay below $29.93 (the breakeven price) prior to July options expiration. These calls are home to current open interest of 1,100 contracts, which means investors traded majority of the options to open. Investors could make a maximum profit of 93 cents on this short call position if EBAY shares hit a ceiling at the breakeven price. This strategy accounts for a potential 10% rally in the stock before investors begin to lose money (maximum losses are theoretically unlimited if EBAY shares climb significantly). While this options action suggests investors are bearish on EBAY, a close look at time and sales suggests investors sold the calls to finance a stock purchase. This means the investor is long EBAY, but protected the long stock position by selling upside calls. Implied volatility of the July 29 calls is 31% compared to the stock's 30-day historical volatility of 23%.

You can easily build a profit/loss graph of this short call position coupled with long stock by opening a free virtual trading account .By doing so, you gain access to several tools essential to stock and option trading that I use everyday.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Options

Referenced Stocks: EBAY , OTM

Jud Pyle

Jud Pyle

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