Name That Trade $EBAY: Palling Around With Geniuses

by Dan October 15, 2014 2:55 pm • Commentary

Back on September 12th, EBAY shares spiked from close to current levels on oddly specific rumors that Google (GOOGL) was going to take a large stake in EBAY in an effort to some way hammer out a deal to combine their electronic payments system (Wallet) with EBAY’s Paypal.  What was interesting to me about this rumor was the just revealed threat from Google’s arch enemy Apple’s PAY that would be one of the company’s first pushes into payment services in an effort to further expand their ecosystem.

At the time I merely bought the stock (read here) as I felt the stock was oversold enough, and where there was smoke there would be fire as the stock’s under-performance had emboldened activist investors like Carl Icahn, and the status quo would no longer stand.  Just a few short weeks late, EBAY announced that they would  do a tax free spin-out of PayPal in an effort to unlock shareholder value.  I sold my stock on the spike, as this was not the news that I was involved in the story, and frankly thought ultimately it would be perceived to be disappointing (read here).

Well, the stock has since round tripped the bulk of any activist lead enthusiasm, and again approaching key long term support, and the almost two year lows at $48, down 14% since Sept 30th:

EBAY 2yr chart from Bloomberg
EBAY 2yr chart from Bloomberg

A break of $48 on the downside would obviously be a disaster for the stock technically, which lends itself for defined risk trades for those looking to play directionally.  Now I know what you are thinking, the move in the VIX up more than 100% in a matter of weeks has made most options unusually expensive, but in the case of EBAY, options prices are still below 52 week highs, and below the 30 realized volatility:

EBAY 1yr chart of 30 day at the money IV (blue) vs 30 day realized (white) from Bloomberg
EBAY 1yr chart of 30 day at the money IV (blue) vs 30 day realized (white) from Bloomberg

I would make one other point, I suspect that if the market continues that way it has into 2015, many of the recently announced corporate break ups will not happen and properties like PayPal will remain on the block.  I would also mention that I think Google will have a fairly short opportunity to grab PayPal to better compete with Apple’s PAY before they get too much of a lead on their own service Wallet and then obviously PayPal itself.   I HAVE NO IDEA IF GOOGLE IS CONSIDERING THIS, BUT THEY SHOULD BE. Which is why any long biased trade should at this point be perceived as speculative, and thus with defined risk.  Why? Well, I doubt that EBAY has given into Icahn out of a position of strength. Their core auction business is slowing, and they know it, and the stock’s performance in a raging bull market was atrocious, so if we are about to go into a more difficult economic environment the stock could be an all out disaster.

I want to make a contrarian, speculative trade that the geniuses (and I mean that sincerely) at Google see their prerogatives in mobile payments the way I do and move their feet on this, before they cede this very important growth area to Apple.  BUT, I am going to wait until after tonight’s earnings and guidance is out. I don’t see a rush to do so as I prefer the right entry to just being there.  Meaning, I am looking longer dated for this to play out and I think the chance of the stock being down 5% tomorrow is far greater than up 5% in this tape.

The trade I am considering (HAVE NOT EXECUTED)

TRADE:  EBAY ($49.65) Long April 52.50 / 62.50 call spread for 2.20

-Buy 1 April 52.50 call for 2.80

-Sell 1 April 62.50 call at .60

Break-Even on April Expiration:

Profits: between 54.70 and 62.50 make up to 7.80, max gain of 7.80 above 62.50

Losses: between 52.50 and 54.70 lose up to 2.20, below 52.50 lose full 2.20

Rationale:  We are focusing on the mid $50s break-even as that has basically been the midpoint of the last year’s trading range as any deal for EBAY as a whole would have to come above the highs, and for them to sell PayPal for cash it would have to be a number that would place the stock back at highs (in my opinion). Otherwise they would be selling on the cheap.