Name That Trade $EBAY – Catching the Falling Knife Edition

by Dan March 13, 2013 4:12 pm • Commentary

EBAY closed down 3.7% today (was down almost 4.5% at one point), and now down about 9% from the 8 year highs made on March 5th and quickly approaching its 200 day moving average which it has not touched in a year.   The price action is interesting because it is on very respectable volume as today will be one of the biggest volume days since mid-January following their Q1 earnings report.

Yesterday, channel check research firm Channel Advisory issued a report suggesting weakness in EBAY’s Feb same store sales:

 eBay’s SSS for February came in at 8.2% (12.2% normalized for leap year) our lowest measurement since April 2011.  Further in the report we provide eBay internal component details which provide details on the February dip.

What’s most interesting is that the report was the reason given for EBAY’s weakness yesterday morning, (stock opened down 3.5% only to close the day down fractionally) and today the stock has for all intents and purposes imploded on no new news.

All of this comes at an interesting time for the stock and the market.  From a macro standpoint, I think it is safe to say that you don’t want to see prior market leaders like EBAY breaking down from multi-year highs on volume, but also on the micro level, after 2 years of mid to high teens earnings and sales growth, a deceleration would certainly cause a re-rating in the stock (see AAPL).

EVENT:  On March 28th EBAY will hold their annual investor/analyst day (here), which could serve as a catalysts one way or the other for the stock.  The company has not set its Q1 reporting date (Bloomberg estimates April 18th cause that’s when they reported last year, but in 2011 they reported on April 27th).   With implied vol where it is (see discussion below) April could set up for a good own if it was confirmed that they will also report Q1 before April expiration.

Additionally in years past, the company has pre-announced the morning of their analyst day as it is kind of hard to get down to the knitty gritty of the business without being free to talk about it before it is publicly disseminated.

Technicals:   EBAY has been in a very strong uptrend for more than a year, as it has not touched its 200 day moving average since January 2012.  Here is the 3 year daily:

3 year daily chart of EBAY, Courtesy of Bloomberg
3 year daily chart of EBAY, Courtesy of Bloomberg

The red horizontal line is drawn at the $51 level, which is where the stock closed in 2012.  Fund managers long EBAY are now close to flat on the year in the name, but those wanting to enter might view 51 as a good long entry level.  Longer-term support lies at the 200 day moving average (black line) which currently sits around 48.40.  The purple line shows the 50 day ma, which has suffered its most severe break since 2011.

Add it all up, and EBAY’s short-term trend is more neutral, but the long-term trend is still definitively higher.

Volatility:  Ebay vol has ticked up recently on the stock’s weakness. April atm IV stands at about 30 which is mid range of normal vol cycles. Here’s how the past year looks with IV30 in red and HV30 in blue:

from LiveVol Pro

With the investor meeting on horizon and the possibility of earnings catching April expiration IV could see the upper 30’s with more uncertainty.

My View:  With little interest in catching a falling knife, but cognizant of the fact that the near term weakness could be overdone, I am going to lay out a couple ways to play for a bounce if in fact the stock continues its decline over the next few days.

Theoretical Trades:

1st: EBAY ($51) Buy the April 52.50/55/57.50 Call Butterfly for .40

-Buy 1 April 52.50 call for 1.35

-Sell 2 April 55 calls at .60 for a total of 1.20

-Buy 1 April 57.50 call for .25

Break-Even on April Expiration:

-Profits of up to 2.10 btwn 52.90 and 57.10, with max gain of 2.10 at 55.

-Losses of up to .40 btwn 52.50 & 52.90 and btwn 57.10 & 57.50, max loss of .40 below 52.50 and above 57.50

Trade Rationale:  As I said above, I am not interested in catch a falling knife, but isolating a bounce range at near term resistance and looking too do so with defined risk and minimal premium outlay.


2nd: EBAY ($51) Sell the April 50/48 Put Spread at .65

-Sell 1 April 50 Put at 1.60

-Buy 1 April 48 Put for .95

Break-Even on April Expiration:

-Profits of up to .65 btwn 49.35 and 50, with max gain of .65 above 50

-Losses of up to 1.35 btwn 49.35 and 48, with max loss of 1.35 below 48

Trade Rationale:  In this trade example I want the stock to chill the u know what out and just settle in at support or move higher.   With IV elevated of late, the timing could be good on the next big down day to sell puts when it appears the stock is very oversold.  If I were to do this I would definitely do a spread because I am worried about a broad market decline that could send a stock like this through support, so I want to define my risk.