New Trade $EBAY – The Buy It Now Option

by Enis October 17, 2013 12:03 pm • Commentary

Dan discussed EBAY in his Morning Word earlier today.  The key takeaway:

As we highlighted in the Morning Word on Monday, market participants want high growth at any price in the current environment.  So even if EBAY offers decent growth at a reasonable price, investors are not willing to give it the benefit of the doubt like they are with other internet companies.

Having said that, we’re on the lookout for how the stock reacts around the crucial $50 level.  If it shows signs of holding, we might take a shot on the long side, since valuation is still reasonable for a company growing sales and earnings at a 15% clip per year.

The stock did in fact hold the $50 level this morning, promptly bouncing after the open as buyers showed up once more.  However, EBAY’s weak results likely mean that a V-shaped rebound is not in the cards this time around.  With that in mind, but also with a cheap valuation (especially for an internet stock) providing near-term support, here’s our trade:  

TRADE: EBAY ($51.53) Bought the Nov 50/52.5/55 Call Fly for $0.71

-Bought 1 Nov 50 Call for 2.40

-Sold 2 Nov 52.5 Calls at 1.03

-Bought 1 Nov 55 Call for 0.37

Break-Even On Nov Expiration:

-Profits of up to 1.79 btwn 50.71 and 54.29. Max profit of 1.79 at 52.5

-Losses of up to 0.71 btwn 50 and 50.71 and btwn 54.29 and 55, with max losses of 0.71 above 55 and below 50.

Trade Rationale:

As with many of our in-the-money call flies, this is not a trade that will make money immediately.  It will take time for the trade to bleed in the decay as long as EBAY remains between 50 and 55.  Given the strong support at 50 and likely resistance in the 54 area due to the many moving averages and the earnings gap, we like our odds, particularly since we’re only paying 0.70 for the fly.  However, this trade will take patience to make money, though in the near-term it won’t make or lose much on up or down moves in EBAY’s underlying stock.