Trade Update – $EBAY : Closing the Calendar for a Push

by Dan January 18, 2013 2:32 pm • Commentary

With EBAY looking like it doesn’t have much of a down move in it into the close we’re going to close the calendar spread we put on in front of Wednesday’s Q4 earnings for a push. We debated the strikes on this trade and in hindsight, by choosing the 52.5 line and getting a push higher in the stock after earnings we were too in the money and should have done the 55 line. What we were left with after earnings was short deltas and long premium, not really what our original play was. But no harm no foul.

ACTION: Sold to Close the EBAY ($54.03) Jan/ Feb 52.5 call calendar at .72



Original Trade:

New Trade $EBAY – Fading The Implied Move

2:54 pm EST – January 16, 2013 By

EBAY’s report tonight is not an easy set up for traders from a directional standpoint as the stock consolidates near 9 year highs and looks poised to make an assault on its all-time high of nearly $60 back in late 2003.  The company has outperformed many of its large cap tech brethren over the last couple years, showing immunity to many of the macro challenges during that period, despite the fact that the company generates btwn 30-40% of their revenues from Europe.  Their PayPal division has been the driver of consistent revenue growth as they are fairly well entrenched in mobile payments which should be a secular trend that continues to grow for years.  One knock on a near term basis is that EBAY’s earnings multiple is getting a tad expensive, near 5 year highs.  Any inclination of an earnings slowdown or margin compression, and there is a decent chance that the stock could face a re-valuation so to speak.  

While I have no interest in trying to pick a top in a stock like this, there is a good shot that the implied move for this qtr (about 6.5%) may be a bit much, and while the stock may not have a ton of downside on just ok numbers and conservative guidance, I am not sure there is a ton of upside on a beat and raise at multi-year highs.

I want to fade the implied move:

Trade:  EBAY ($52.59) Bought the Jan19th  / Feb 52.50 Call Spread for .72

-Sold 1 Jan19th 52.50 call at 1.90

-Bought 1 Feb 52.50 call for 2.62

Break-Even on Jan19th Expiration Friday:

If implied vol settles in the high 20’s like we expect, then this calendar trade should be profitable as long as EBAY stays between 49.50 and 55.50 by Friday’s close, ideally, the stock ends up at 52.50, but I might take the trade off tomorrow depending on what implied vol in Jan and Feb does.

Trade Rationale:   Given an equal balance of positives (consistency of business, strong e-commerce trends) and negatives (high valuation, heavy European exposure), I like playing for a subdued reaction to the earnings event.  Just don’t see a ton to get excited about here in either direction.

Payout Diagram: The red line represents the position today, not much will happen up or down within this range. The yellow represents next week and the Blue February.

Risk Chart - EBAY - eBay Inc._window_screenshot



Original Post Jan 15, 2013:   $EBAY Q4 Earnings Preview

Event:  EBAY reports Q4 earnings Wednesday after the close.  The options market is implying about a 6% move post-earnings, which is below the 4 qtr avg move of about 7.75%, but above the 8 qtr avg move of about 5%.

Sentiment:  Wall Street analysts are fairly bullish on the stock with 27 Buys, 14 Holds and 0 Sells, and an average 12 month price target of around $57.  The stock has rallied 72% in the past year, and is about 10% from its all time high of 59.21 set in 2004.

Fundamentals / Valuation: EBAY has been a consistent performer in the past 3 years, growing earnings and sales at a steady 10-20% annual rate, with gross margins relatively unchanged in that period, between 70 and 72%.

There isn’t much new to add to the big picture since last quarter (aside from strong holiday sales).  Here’s what I wrote in the Q3 preview, all still applicable today:

Its business is split up into 3 parts:  the Marketplace business (classic eBay, as well as add-ons like StubHub), the Payments business (primarily Paypal), and GSI (an e-commerce and marketing business).  Marketplace makes up 55% of revenues, Payments about 40%, and GSI about 5%.  International is a big portion of the business, around 60% of revenues coming from outside the U.S.

The clear growth story that has been the driver of the stock in the past couple years is Paypal.  The Marketplace business has been a 10% grower, but Paypal is growing 25-30%, and margins have actually been improving in the process (job cut announcement last week at Paypal might be another indication of management intending to keep margins high).

Valuation:  I think this is where the debate will take place on whether the stock goes higher or lower.  If earnings and guidance are positive, which I expect, the real question is whether valuation here is too rich or not.  Here is the chart of the P/E ratio over the last 3 years:

The P/E is at 3 year highs as the stock is up almost 60% year-to-date.  What’s interesting is that the projected growth rates from analyst estimates for 2013 and 2014 are the same as the earnings growth rate in 2011 and 2012.  Clearly, investors and traders think analyst estimates are too low.

Since then, estimates have moved about 5% higher after EBAY’s strong Q3 report, and the stock is about 10% higher in the interim.

Technicals:  EBAY’s uptrend is about as steady as you’ll find.  Here is the 1 year chart:

Screen Shot 2013-01-15 at 1.51.06 PM


I left the 50 day ma (pink) and 200 day ma (black) on the chart to illustrate just how strong the uptrend has been.  The stock hasn’t even come close to the 200 day ma in the past year.  It eventually will, but the momentum has been strong enough that I think sideways consolidation is more likely than a quick move lower (unless it’s a terrible earnings number).

Volatility:  What catches my eye here is the low level of 30 day realized volatility (blue line) in EBAY relative to the past year:

[caption id="attachment_21531" align="alignnone" width="666"]Screen Shot 2013-01-15 at 1.40.56 PM Courtesy of LiveVol Pro[/caption]

Against that, implied volatility (red line) is not too far from where it was priced before the previous 3 earnings reports.  My first instinct is to sell 1 month volatility to take advantage of this discrepancy, especially since I don’t expect any major surprises from EBAY on its earnings call.  The stock seems stretched, but the fundamentals are strong.

My View:  Given EBAY’s consistent performance, I expect another strong earnings report from the company.  However, I still think valuation a bit stretched, which leads me to lean towards a range trade, especially given the large spread between implied and realized volatility.  I’ll post any trades tomorrow.