Trade Update – $EBAY: Cutting Losses on Dec Call Fly

by Dan November 25, 2013 11:10 am • Commentary

Back on Nov 1st we closed a Nov Call Butterfly in EBAY for a gain (here, immediately below) and rolled the exposure out to December with a wider call fly.  Well, today the stock has broken the all important $50 technical support level that we flagged on both trades, and with 3 weeks till Dec expiration, and the stock breaking down, we want to avoid further decay on the 50 strike that we are long and cut our losses. The chart is a disaster at this point breaking down on volume through a level it has held on 5 prior occasions this year.

EBAY 1yr chart from Bloomberg
EBAY 1yr chart from Bloomberg

Since the time of the second trade, the stock is down about 5%, and down about 8% from the highs made earlier in the month.  I have no idea why the stock lags so badly so I am going to take my loss and move on.

ACTION: Sold to Close EBAY ($49.20) Dec 50/55/60 Call fly at .75 for an .85 loss*

This loss was partially offset by the .34 gain from the tighter Nov Call Fly.



Original Post: Considering Our Options and Alternative Structure – $EBAY

About a week and a half ago, we highlighted the range that EBAY has been trading in for 2013 and offered a way to play that range after the stocks earnings decline offering a decent entry point with an eye towards November expiration. We wanted to go over the current trade in November and look at another structure that pushes the thesis out wider and longer thru December expiration. Dan will be going over the December structure on tonight’s Options Action on CNBC.

First, let’s look at our current position initiated on Oct 17th:

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

With the stock about the same price as when we put on this trade, the structure is actually up money which is a result of the decay happening in the short premium as long as the stock stays above 50.71 and below 54.29. We like the setup here and would only rethink the thesis of EBAY threatened to breakdown at that 50 level.

Why are we looking at this stock again, and offering a new structure?  Largely because of AMZN’s results and the stock’s price action more importantly should cause investors to take another look at EBAY which has not participated at all in this rally as we get deeper into the holiday selling season.

We like the idea of a contrarian long play with defined risk and taking much of the vol risk out of the trade with the use of an in the money call fly.  But most importantly the stock continues to bounce off of $50 (red line below) every time it gets down there (did last week post earnings), and we suspect it will again.  The flip side though is that the stock has had a difficult time holding gains above $55 (green line below) and we see this as good resistance.  Play the range with defined risk!

EBAY 1 yr chart from Bloomberg
EBAY 1 yr chart from Bloomberg

Going out to December, a similar structure offers even more upside in the stock in case it moves back to the upside of it’s 2013 range. The Nov structure does the same thing at a lower center and will play out quickly over the next few weeks. The December trade is interesting for farther out and a higher center. We’re going to feature the December trade idea on TV. Here’s that structure:

TRADE: EBAY ($51.55) Bought the Dec 50/55/60 Call fly for 1.60

-Buy 1 Dec 50 Call for 2.80

-Sell 2 Dec 55 Calls at .70 of 1.40 total

-Buy 1 Dec 60 Call for .20

 Break-Even on Dec Expiration:

-Profits: gains of up to 3.40 btwn 51.60 and 58.40, with max gain of 3.40 at 55

-Losses: lose up to 1.40 btwn 50 and 51.40 and btwn 58.40 and 60, max loss of 1.40 below 50 and above 60