Trade Update EBAY – Selling Call Fly for Small Loss

by Enis May 22, 2014 12:59 pm • Commentary

We have tried to be patient with the EBAY call butterfly because the position does not expire until June 21st expiration.  However, the company’s recent announcement that customer account information has been hacked has put the stock under pressure over the last 2 days.  While the stock’s valuation is still a major positive, and probably a major reason why the stock continues to find support near $50, this sort of headline has the potential to act as an extended overhang as the public relations battle can be quite messy.

Our call fly that we put on prior to earnings is only a small loss even though EBAY is down nearly 5% from our initial entry price, so we are going to take the small loss and move on.

Action: EBAY ($51.45) Sold to Close the June21st 50/55/60 Call Butterfly at $1.60 for a $0.20 loss



Considering Our Options – EBAY Range Trade, April 30, 2014

At first glance, EBAY’s report last night was a good one, beating on expected revenues and headline adjusted earnings, with solid growth in its main businesses, including continued 20%+ growth in PayPal.

However, the stock is trading 6% lower this morning, likely due to the lackluster guidance for Q2 and the balance of 2014.  The guidance was not a big miss by any means.  We noted in yesterday’s earnings preview, though, that guidance could be more important than the headline result given the higher expected growth later this year.  Based on the market’s reaction, many participants were more focused on guidance as well.  

Nonetheless, we still expect EBAY to be supported by buyers who like the current valuation, no matter the tepid forecast.  Our long June21st 50/55/60 call fly is currently worth around $1.45, which is lower than the $1.80 we paid for it.

At this point, we have our finger on the trigger to exit this trade if EBAY breaks the $50 level, where the intrinsic value of our call fly will be 0.  For now, we’ll risk some extra downside in the call fly to see if the stock can stabilize above the $50 support level.


New Trade – EBAY:  Connecting Buyers and Sellers, April 29, 2014

EBAY reports earnings after the bell today.  We have had decent success trading EBAY so far in 2014, with two winners (here and here) and one small loser (here), after Dan adeptly anticipated activist involvement in EBAY in this post back in November.

We previewed EBAY earnings earlier today.  The options market is implying about a 5% move for the event.  Here was our conclusion from that preview:

Given the low bar for the headline EPS number for this quarter, we’d be surprised if EBAY missed this quarter.  However, guidance is more important with higher second-half expectations, and investors will likely need more positive news than last quarter to bid the stock up since activist pressure for a spinoff is gone.

Overall, it feels like the range-bound situation continues with the valuation support on the downside, but no catalyst / technical resistance on the upside.  Implied volatility is a bit low to sell for the earnings event, but we might look at a range trade later today.

Since the options market is implying about a 5% move, that would put EBAY stock around $51.50 on the downside, or $56.50 on the upside if EBAY did indeed move 5% tomorrow.  That’s still within the $50 to $57.50 range that seems likely to hold.  With that range in mind, and no major catalysts for EBAY after the earnings event, we like the following call butterfly that would benefit from continued rangebound price action:

TRADE: EBAY ($53.97) Bought June21st 50/55/60 Call Butterfly for $1.80

-Bought 1 June21st 50 Call for $4.70

-Sold 2 June21st 55 Calls at $1.62 each ($3.24 total)

-Bought 1 June21st 60 Call for $0.34

Break-Even on June21st Expiration:

Profits: btwn 51.80 and 58.20 make up to 3.20 with max gain of 3.20 at 55

Losses: btwn 50 & 51.80 lose up to 1.80, btwn 58.20 & 60 lose up to 1.80, below 50 and above 60, lose full 1.80.

Rationale:  Since there is a low bar for EBAY’s quarter, and EBAY is one of the few decently valued tech stocks that has not caught a “value” bid in the past month, the call fly positions for slight upside over the next 6 weeks.  This trade structure will take time to make profits, so it is less risk but less reward than a shorter-dated call fly with the same strikes.