Trade Update $EBAY: Turning July Call into Call Calendar

by Dan June 26, 2014 9:58 am • Commentary

A few weeks ago we made a defined risk contrarian bullish trade in EBAY, predicated on the belief that the stock could rally into their Q2 earnings scheduled for July 16th.  At the time we just bought a call outright with the idea that we would look to spread as we get closer to our strike.  Now with the stock up a couple percent we are going to look to sell a shorter dated call of the same strike, creating a calendar to help offset some decay, and reduce deltas into what could be a quiet holiday week next week.

ACTION: Sell to Open EBAY ($49.35) July 3rd Weekly 50 call at .29
New Position: Long EBAY ($49.35) July 3rd weekly/ July regular 50 Call Calendar for .78




Original Post June 10th, 2014:  New Trade $EBAY: Buy it Now?

And the hits keep coming for EBAY with three fairly negative headlines in just the last few weeks:

1. The late May acknowledgement of a data breach that might have affected as many as 150 million customers.

2. Paypal’s increasing challenges on multiple fronts, the latest coming from Amazon just yesterday with the company launching a service to manage subscription payments, encroaching on one of their core offerings

and possibly the most significant in the near term from a sentiment standpoint;

3.  Paypal President David Marcus leaving EBAY to run Facebook’s messaging unit.

This morning (Valuations. Out With the Old & In With the New) I suggested that investors willingness to bid up valuations of internet companies with uncertain futures (FB) while discarding those with tried and true consistent earnings growth (EBAY) is just another notable divergence in this raging bull market at all time highs.

Specifically, as it relates to EBAY:

investors are heavily discounting the company’s future prospects with the stock trading at a market multiple with forward earnings and sales growth in line with its forward PE (~14x), and trades at only 3x those expected sales.  The stock, which has had double digit earnings and sales growth in every year of its existence except 2009 and 2010, trades in a raging bull market as if the smart-money knows that the jig is up and Ebay is going back into the Beanie Baby trading business.

While the stock has been cheap for sometime, the current technical set up is what has really grabbed my attention.  EBAY is down nearly 12% on the year, and nearly 20% from the multi-year highs made shortly after Carl Icahn announced his stake and proxy intentions in the company.  The three charts below tell sort of different stories and if relied along on their own could have investors arrive at different conclusions.

On a one year basis, the stock is re-testing the prior lows, and if it is gonna hold, this would be the spot, from a very oversold condition:

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

On a three year basis, the stock just broke recent support at $50, and a break of the late 2013 low (not far from where we are now) could easily see the stock back at $45:

EBAY 3yr chart from Bloomberg
EBAY 3yr chart from Bloomberg

And this is the chart that scares me a bit, the chart since its 1998 IPO.  Did the stock just put in the mother of all double tops???

EBAY since IPO from Bloomberg
EBAY since IPO from Bloomberg

But here is the thing, charts are charts, they suggest where stocks have been, and to be honest, the most hardened technicians would likely admit they have very few true predictive capabilities.

I guess what I would most focus on is the potential for management to get more proactive about boosting the share price given the increased scrutiny.  First of all, activist investor Carl Icahn could turn up the heat on the company after the stock’s underperformance and the departure at the PayPal unit.  But aside from Carl, management is likely already feeling pressure from all shareholders given the security breach as well as the stock’s underperformance.

Given that pressure, management might finally be looking at ways to get shareholders excited about the company again, such as a large buyback program, strategic action, or even possibly agreeing to Carl’s long proposed PayPay spinoff.  While EBAY management re-patriated cash last quarter, leading to acquisition speculation, management is likely quite concerned about a dilutive cash outlay when sentiment surrounding the company is so poor.

In short, management might get shareholder friendly, and fast.  With stock depressed, sentiment poor, and management under the gun, we like playing for upside over the next 4 months:

TRADE: EBAY ($48.45) Bought July 50 calls for 1.07

Break-Even on July 19th Expiration:

Profits: above 51.07

Losses: up to 1.07 between 50 and 51.07, max loss of 1.07 below 50

Rationale:  Options prices have recently ticked up, but owning July which catches the company’s Q2 results on July 16th should help options prices stay well bid.   On  a move back to $50 prior to earnings I will look to spread these calls and reduce my break-even and help off set potential decay.