Trade Update – $EBAY: Selling Call Butterfly For a Profit

by Enis January 5, 2015 11:32 am • Commentary

EBAY has moved lower with the market in the past week, and is now nearing the $55 midpoint of our range trade that we put on in mid-November (full post below).

At this point, the call butterfly is worth more than $3 with less than two weeks remaining until expiration.  If EBAY remains between $53.50 and $56.50, the trade will continue to gain in value.  However, the risk/reward of the trade at this juncture is less attractive as we approach expiration since a move in either direction could lead to a quick decline in the trade’s profitability.  Put another way, the original range trade thesis has played out.  Holding on to the trade for the last 10 trading days to squeeze out incremental profits is probably only going to be realized in any significant manner in the last few days into expiration. Therefore we’ll take the profits here:

Action: EBAY ($55.35) Sell to close the Jan17th 50/55/60 Call Butterfly at  3.34 for a 1.40 gain

– sell to close 1 Jan 50 call at 5.45

– buy to close 2 Jan 55 calls for 1.08 (2.16 total)

– Sell to close 1 Jan 60 call at .05



New Trade – $EBAY’s Paypal Spin-off: A Different World

EBAY has moved right back to the middle of its 2 year range after a brief dip in mid-October after a disappointing earnings report.  EBAY has been headline heavy over the past year, but the stock has is nearly unchanged in 2014.  Most recently, EBAY spiked on Sept. 30th after the company announced the long-anticipated split of PayPal from the core EBAY business.  However, the stock made a new 52 week low after its earnings report in mid-October, before bouncing once again.

One look at the 2 year weekly chart illustrates the magnetic draw of the mid-$50’s price area:

EBAY weekly chart, courtesy of Bloomberg
EBAY weekly chart, courtesy of Bloomberg

Dan laid out a potential bullish trade idea on EBAY on Oct. 15th, citing the importance of the payment industry shakeout to Google now that Apple had thrown its hat in the ring.  Carl Icahn had been badgering management to spin off PayPal to better realize the value of that sought after asset, and it’s possible that Apple Pay’s announcement led to the final decision to separate PayPal.  All of a sudden, the division might need much more attention to compete effectively.

In the meantime, EBAY’s Marketplace business has been under pressure in 2014 as a result of Google’s search algorithm changes as well as a data breach at EBAY that caused the company to reset all member passwords.  Management discussed those headwinds on the mid-October earnings conference call:  

As I think about 2014, specifically you see a few dynamics going on during the course of the year, some which are the same, and some which are a little bit different. The same, particularly for Marketplaces, is the first quarter and the fourth quarter are the highest segment margins within the year.

And the second and third quarter historically have always been the lowest. So that dynamic is what is continuing during the course of 2014. What exacerbates that is the higher spend we made in Q2 and Q3 to drive traffic, particularly in light of the cyber security breach and the SEO changes.

It’s no coincidence that management emphasized the investment in the PayPal brand as well, especially with the spinoff that is expected in the middle of 2015:

With that growth, we still maintain north of 60% transaction margins. More recently what’s different is we’ve begun to invest more in the PayPal brand. From a position of strength to drive more brand awareness and drive consumers perceptions of PayPal to capitalize on what we believe is a wonderful brand that has lots of use cases for merchants and consumers.

And Ross, on your second question on PayPal and Google Wallet, Apple Pay, just to reiterate what I said when we talked about separation. Over the last couple years, PayPal has been working really hard to be able to enable payments in all of the technology ecosystems.

Our ambition is to be able to enable payments anywhere consumers want to shop and pay. And that was one of the things that contributed to our acquisition of Braintree, and it’s something that is an important part of PayPal’s future. And we have been working hard to make sure that PayPal can be an effective form of payment inside of Google’s ecosystem, and as you said, I think we’ve made some nice progress on that. It’s going well.

The recent rally in the shares is likely anticipation by market participants that the stock will remain bid until the spinoff is complete.   Contrast that buying rationale, however, with the weak results of the eCommerce business, and a short-term stalemate seems to be the most likely scenario, at least until the Q4 results released on January 21st.

What about the timing of the PayPal spin-off?  More details will likely be forthcoming at some point between the Q4 earnings release on Jan. 21st and the Q1 earnings release in mid-April.  That might be the time to play for a rally in EBAY shares.  Until the Jan 21st earnings release, though, we like the idea of playing for continued rangebound price action, especially since the Jan15 options expire on January 17th, just prior to the earnings release.

Here is the structure that we like for this setup:

TRADE: EBAY ($54.35) Buy to Open the regular expiry Jan15 50/55/60 Call Butterfly for $1.94

-Buy 1 Jan15 50 call for $4.90

-Sell 2 Jan15 55 calls at $1.65

-Buy 1 Jan15 60 call for $0.34

Break-Even on Jan15 Expiration:

Profits:  between 51.94 and 58.06 make up to 3.06 with max gain of 3.06 at 55

Losses: between 50 & 51.94 and between 58.06 & 60 lose up to 1.94 with max loss of 1.94 below 50 and above 60

Rationale:  This trade will gradually make money over the next two months if EBAY continues to trade between $52 and $58.  It is not a trade for those who have a strong bullish or bearish view on EBAY shares, but is a good risk/reward position to express continued rangebound price action in the stock.