Synthetic long stock (split strikes) play on eBay (EBAY)

By Jud Pyle, CFA,

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Shares of eBay Inc. (NASDAQ: EBAY ) dropped about 2% to $21.50 during morning trading, underperforming the broad market by about 1%. Options action from one investor, however, suggests the upside could return to the shares as they bought some calls and simultaneously sold some puts.

At approximately 10 a.m. EST, we saw 6,500 October 19 puts trade for a price of $1.01 per contract. At the same time, the same number of October 26 calls traded for 55 cents per contract. This means that the investor collected a net credit of 46 cents on this spread. If shares of EBAY rally, the calls should appreciate, while the puts decline, which is why we say that this trade is bullish, and looks a lot like long stock. As recently as April 14, shares of EBAY were trading more than 25% higher, up around $27. If this investor is thinking that EBAY could quickly regain those levels, this options play is a fair way to express that bet.

Looking closely at time and sales of shares for EBAY, we also find that a large block totaling 325,000 shares of stock traded around 10 a.m. EST for $21.73. This block of shares is the amount needed to make this trade delta-neutral. So it is possible that this trade was initiated by someone betting more on volatility. The implied volatility of the calls they bought was near 34, while the implied volatility of the puts is near 42%. The investor could be betting that that spread will decline. However, a look at this position in a profit/loss graph from my virtual trading account shows that even with the short stock, the position makes money as the stock rallies. Also, it is quite possible that the investor traded the spread delta neutral, but already owned the stock, so is replacing a bullish stock position with the options for a different risk profile.

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

This article appears in: Investing Options
Referenced Stocks: EBAY

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