EBAY hit its highest level since late September this morning after Carl Icahn criticized EBAY’s board in a letter to shareholders, continuing to push for a spin-off of PayPal, as he first stated in January. The stock is now in the crucial $56-$58 area, where it has been rejected on many occasions over the past year:
The March 55/60/65 call fly that I bought back in January is currently worth about $1.65 (vs. initial entry price of $0.95) with the stock around $56.45. Most of the value in the structure derives from the March 55 calls (worth around $2.20), since the March 60 and 65 calls have decayed since last month.
The call fly is currently a 35 delta structure, which means that it will change in price by about $0.35 for each 1 dollar move in EBAY stock. The structure has almost no time decay, which means that the main driver of the position in the near-term is going to be the movement in EBAY, higher or lower. Time decay will start to be a bigger driver of the structure’s value if EBAY moves back down to near the $55 strike call in the coming weeks.
Icahn’s involvement since EBAY’s earnings announcement has not resulted in much of a pop for EBAY prior to today. However, today’s announcement indicates a new level of aggressiveness on Icahn’s part. His rhetoric has become more personal, which is a strong sign that Icahn is in this fight for the long haul. Carl Icahn has shown a propensity over the past few years to become more vocal in situations where he has significant conviction.
Paypal is the main reason why many value investors own EBAY in the first place. A spinoff would be a major positive for shareholders, though the board released a statement shortly after Icahn that indicated no change in the board’s position. Regardless, the mere presence of Icahn likely keeps a bid to the stock.
The main risk for the call fly at this point is probably if the stock stalls in the 54-56 area. However, decay won’t pick up on the structure for another couple of weeks, so we’ll hang on to the trade for now.
Original Post January 23, 2014: New Trade $EBAY – eCahn
Earlier today we closed a winning bullish trade that was positioning for some sort of activist interest after a disappointing quarter and guide (see our commentary below). Now with both out of the way, we suspect that we could see a period of calm in the stock where investors who were in the stock for a bit more than what we saw from Carl Icahn, are possibly out given today’s weakness, we want to set up for a move back towards last night’s after-hours highs near $60 in the coming months.
Here is the trade:
TRADE: EBAY ($54.45) Bought March 55/60/65 Call Butterfly for .95
-Bought 1 March 55 call for 1.90
-Sold 2 March 60 calls at .575 for a total of 1.15
-Bought 1 March 65 call for .20
Break-Even on March Expiration:
Profits: btwn 55.95 and 64.05 make up to 4.05, max gain of 4.05 at $60
Losses: btwn 55.95 and 55 lose up to .95, btwn 64.05 and 65 lose up to .95 with max loss of .95 below 55 and and above 65
Rationale – We think there is a good chance that the stock breaks out in the next few months amongst all the activist talk. 60 seems like a good spot considering where the stock traded in the after hours following the news. This is a relatively cheap way to be reasonably bullish for a move back towards 60 in the next few months.
Previous Post Jan 23rd, 2014: Trade Update – $EBAY: Closing Jan Weekly / April Call Calendar For A Gain
EBAY is higher this morning following its earnings release and the news of some activism from Carl Icahn that we’ve been anticipating for some time:
In late November I wrote that a piece titled “EBAY Looking More & More Like Activist Investor Bait” because it struck me that a company like EBAY with their strong cash generation, rock solid balance sheet could become the target of an activist who would push for larger share buybacks and the introduction of a dividend. Your guess is as good as mine on this front, but back in Nov when there was some unusual call activity in the name, it was also met with some rumors of possible interest of Carl Icahn.
The stock got as high as 60 after hours on the Icahn news but is well off those highs this morning as people possibly realize that spinning off Paypal isn’t actually a new thought and it is something that the eBay board has stated repeatedly that they disagree with. With the stock slightly below our strike and the calendar profitable I am going to close the position due to the stock’s erratic behavior and look for a better entry for a long set up as I think where there is smoke there will be fire.
Action: EBAY ($54.57) Sold to close Jan 24th / April 55 Call Spread at 2.00 for a .65 gain
Previous Post Jan 14th, 2014: New Trade $EBAY: eBAIT
On a few occasions last year we took a shot on the long side on EBAY (here). The stock remained range-bound for most of the year between $50 and $58. There was money to be made for traders who bought at $50 and sold in the mid to high $50s, but buy and hold investors in the stock were left with no return relative to a market that was up 30% plus.
Last year the company grew earnings & sales (assuming Q4 is inline) at 14% year over year. Not bad, but bears would argue that the growth is decelerating. That being said, analysts expect 15% growth this year, higher than last. What astounds me is that I am hard-pressed to find another $60 billion plus market cap company in the tech space that trades on a PE basis at ONE times that growth.
In late November I wrote that a piece titled “EBAY Looking More & More Like Activist Investor Bait” because it struck me that a company like EBAY with their strong cash generation, rock solid balance sheet could become the target of an activist who would push for larger share buybacks and the introduction of a dividend. Your guess is as good as mine on this front, but back in Nov when there was some unusual call activity in the name, it was also met with some rumors of possible interest of Carl Icahn. The company and the stock checks a lot of boxes for activists, but not being one I am generally unfamiliar with their process, so i’ll just stick to the options stuff.
The company reports Q4 earnings on Jan 22nd and the options market is implying a one day move of about 5%, which is basically in line with the 4 qtr avg of about 4.75%. I will mention that the last 3 qtrs the stock has sold off on avg of about 5.5% following results.
Analysts remain overwhelmingly bullish on the stock with 35 Buy ratings, 10 Holds and no sells with an average 12 month price target of $62.40 or about 19% higher than current levels. Last week Morgan Stanley downgraded the stock suggesting:
“While management deserves accolades for the business turnaround and is positioning eBay as a key player in omni-channel long term, we see risk to 2014/2015 estimates. Without positive catalysts that will allow investors to incorporate eBay’s omni-channel/offline initiatives into their numbers, we believe the current risk-reward profile is balanced.”
So while the Street remains generally bullish, investors are bracing for a downward revision to future earnings. I have no clue what they guide to, and if the quarter is inline and guidance is inline I suspect investors will remain skeptical. I want to be bullish, but I want to look to do so with defined risk and look to finance this view that could take some time to play out.
TRADE: EBAY ($52.93) Bought Jan 24th (next week) / April 55 Call Spread for 1.35
-Sold to open 1 Jan 24th 55 call at .82
-Bought to open 1 April 55 call for 2.17
Break-Even on Jan 24th Expiration:
-Profits are maximized at 55 on Jan 24th expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.
-Max risk is $1.35
Trade Rationale: I am not really looking for a beat and raise quarter, so I am not anticipating a massive move higher, but I want to take advantage of the elevated implied volatility in next week options for earnings to help finance the purchase of longer dated calls.