Considering Our Options: $Ebay Call Calendar

by CC July 2, 2014 12:55 pm • Commentary

Less than a month 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. Here was the original trade:

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

Once the stock rallied a few percentage points off the lows we sold a shorter dated call of the same strike, creating a calendar to help offset some decay, and reduce deltas into what is proving to be a quiet holiday week:

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

With the stock just above the 50 strike today (50.60) the calendar is worth about 1.05. The issue from a trade management strategy is what to do with the portion of the structure expiring this week?

There is basically no extrinsic premium left in the weekly 50 calls, and about 1.05 in extrinsic premium left in the July regulars. (the 1.05 in extrinsic premium is represented in the July 50 puts, the Weekly puts are only worth .03)

Since there is no extrinsic premium left in the weeklies, they are essentially acting as short stock against the July 50 calls that we are long into earnings for a net short delta currently of about -40. What that means is if the stock were to pull back towards 50 this week, the structure would be worth about 20-25c more than it is now. If the stock were to go up to its 50 day moving average of 51.05 the structure would be worth about 20c less.

Because of this delta risk we are likely to close the weekly portion of the position if it looks like a break above the 50 day moving average is possible. (We faced this same scenario a few weeks back in TWTR and rolled the calendar into a call spread when the stock went through our calendar strike.)

If the stock is to pull back towards 50 instead we’ll try to be as patient as possible in taking the short call off and would look to use those profits to possible spread the long call or if the profits are good enough (closer to 50) we could just take the money and run.

Speaking of spreading the long call, one subscriber asked a question about turning the structure into a butterfly:

I’m considering changing the Ebay position into the Jul 50/55/60 fly as a way to roll out of the Jul 3rd 50 Calls.

That’s another interesting possibility, and also benefits from timing as well as possible with the closer to 50 the better (taking off the short call for as little as possible so the net premium exchange in closing that and doing the Fly’s 2×1 is as small as possible)

We’ll update when we make a move.