Bigger moves in store for eBay (NASDAQ: EBAY)?


A hefty number of near-term straddles changed hands in eBay Inc. (NASDAQ: EBAY ) during afternoon trading today, and the options action suggests investors anticipate significant moves in the stock.

EBAY shares are currently down nine cents to $26.24 so far on the day without any news from the online auction house. EBAY is due to announce earnings on April 21 after the market closes, and analysts polled at Thomson Reuters estimate earnings of 41 cents a share. It looks like at least one investor anticipates a big move in the stock as a result of the earnings announcement.

Make sure you have your profit/loss graph open to evaluate the risk/reward dynamics of this EBAY long straddle. Open your own free virtual trading account today and access tools that professional and novice traders use each day.

By 3:19 p.m. EST, more than 6,000 May 26 straddles had crossed the tape thanks to investors who most likely bought these spreads for $2.45 each ($245 per lot). The May 26 calls, home to current open interest of 1,200 contracts, changed hands for $1.26 per contract, while the May 26 puts, home to current open interest of 2,700 contracts, crossed the tape for $1.19 per contract. This action suggests investors will make money if EBAY shares trade lower than $23.55 or higher than $28.45 prior to May options expiration in 32 days. Investors who bought these straddles need the stock to move away from the $26 level by more than $2.45. Risk in this trade is limited to the premium paid, or $2.45 per straddle, if the stock is right at $26 at expiration. However, if the stock drops significantly or rallies higher, investors make significant profits. Straddle buying such as this is a volatility bet, not necessarily a directional bet. Investors don't care which way the straddle moves, just that it does move. The profit and loss graph below portrays the breakevens and profitable territory of this long straddle.

So, will EBAY shares move enough for this long straddle to turn profits? Given that the shares have moved more than 10% in two out of the last four earnings announcements, it is understandable why someone is willing to bet that the shares can move yet again.

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

Jud Pyle

Jud Pyle

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