With the help (agitation) of activist investor Carl Icahn, EBAY is up 9% on the week, making new 9 year highs and quickly approaching the all time highs made in late 2014. While EBAY’s management and board seem to disagree with some of the suggestions Icahn has made, investors seem to voting with their wallets. This story will clearly have legs and if the initial reaction to Mr. Icahn’s claims are any indication of how this fight will go, Icahn is likely to have another nice winner on his hands un-locking shareholder value.
Our bullish trade from January, was predicated on continued activist intervention, a theme that we had suggested since the fall (Looking More & More Like Activist Investor Bait), is quickly approaching the sweet spot for our March Call Fly. Rather than take on any headline risk as the battle between Carl Icahn and the eBay board plays out, we’ll take our money and run and look for another opportunity to play from the long side on a pullback.
Action: Sold to Close EBAY (59.60) March 55/60/65 call butterfly at 2.40 for a 1.45 gain (paid .95)
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.