Online auctioneer eBay Inc. (
) has attracted quite a bit of attention from put traders today, as
options speculators position themselves ahead of tonight's
quarterly earnings report. For the record, EBAY is expected to post
a profit of 42 cents per share, up from earnings of 37 cents per
share in the same quarter last year. Historically, the company has
bested the consensus view in three of the prior four reporting
periods, with an average upside surprise of roughly 8%.
Returning to the options pits, more than 10,800 puts have
changed hands on EBAY so far today, nearly quadrupling the stock's
average daily put volume. The most popular put has been the January
2011 30 strike, where some 7,000 contracts have crossed the tape.
Taking a closer look at 30-strike activity, however, reveals that
there was at least one trader with neither bullish nor bearish
designs on EBAY. Specifically, the online auction house appears to
have been targeted by a calendar spread.
For the uninitiated, calendar spreads are generally neutral in
terms of movement in the underlying stock - though you can skew the
spread bullishly or bearishly by altering the strike prices.
Ultimately, this strategy is designed to take advantage of
declining implied volatility, with the trader typically betting on
little-to-no movement from the underlying stock. By entering the
calendar spreads ahead of eBay's quarterly report, the trader is
essentially betting that the stock will go nowhere, and that
implied volatility will implode as a result.
Getting down to the trade itself, a block of 151 January 2011 30
calls traded at about 11:13 a.m. Eastern time on the Chicago Board
Options Exchange (
) for the bid price of $0.54. At the same time and on the same
exchange, 151 February 30 calls changed hands for the ask price of
$0.90. Given this data, it would appear that we are looking at a
on eBay. This strategy is also known as a time spread, or a
The Anatomy of an eBay Calendar Spread
Now, this setup may not make a lot of sense to beginning options
traders, but the investor above is looking for accelerated erosion
in the implied volatility of the front-month option, which he hopes
to buy back at expiration for practically nothing, while collecting
a larger premium by selling to close the back-month option.
Drilling down on today's EBAY calendar spread, the trader sold
151 January 30 calls for $8,154 -- ($0.54 * 100) * 151 = $8,154. At
the same time, the trader purchased 151 February 30 calls for
$13,590 -- ($0.90 * 100) * 151 = $13,590. The total outlay for this
position would be $5,436 -- $13,590 - $8,154 = $5,436.
The maximum loss on this trade is limited to the initial net
debit of $0.36, or $36 per pair of contracts. Meanwhile, the
maximum profit is limited to the premium received for the
back-month option when it is sold to close out the position, minus
the cost to buy back the front-month call, minus the net debit paid
to establish the position. The maximum profit is achieved if EBAY
closes at $30 per share on January expiration.
Since there are two expiration dates for this trade, and we
cannot know for certain what the exact value of the February 30
call will be when the January 30 call expires, we can only estimate
the approximate return on the EBAY calendar spread. In the
best-case scenario, EBAY would close at the 30 strike when January
options expire, allowing the January 30 call to expire worthless.
At that point, the February 30 call would be worth only its time
value and implied volatility -- no intrinsic value.
In this example, the February 30 call will be worth an estimated
$1.31 at January expiration, according to
pricing calculator, allowing the trader to sell to close the
position for $131 per contract. After subtracting out the cost of
the position ($0.36), the trader would snag a profit of $0.95, or
$95 per contract. Below is a chart for a rough visual
The most ideal calendar spread trade occurs when near-month
implied volatilities are high relative to options with a longer
life. Optimally, the spread trader needs implied volatility to
remain steady on the shorter-term sold option (or to increase on
the purchased option). The best-case scenario for a calendar spread
is that the sold option expires out of the money, while the
purchased option retains time premium. At the time of the trade,
implieds for the EBAY January 30 call arrived at 78.83%, while the
implied volatility for the February 30 call rested at 35.30%. For
comparison, as of the close of trading on Tuesday, EBAY's one-month
historical volatility rested at 24.42%, while the stock's two-month
historical volatility was 25.94%.
The winter 2011 issue of
magazine is now available here.
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