Name That Trade $EBAY: A Paypal Dispute

by Dan January 21, 2015 3:15 pm • Commentary

EBAY reports their Q4 results tonight after the close, the options market is implying about a 4% one day move in either direction, which is a tad shy of the 4 qtr avg move of about 2.8%.

In Tuesday’s Notable Options Activity post this morning I highlighted the following call activity from yesterday:

EBAY saw a bullish roll down when stock was $53.17. A trader sold 7500 April 60 calls at .62 to close and bought 7500 April 55 calls for 1.90 to open.  Total options volume ran 2x average daily with calls making up 90% of the volume.

Given the choice of April expiration I suspect the trader is less interested in the earnings event, and more interested in investors once again focusing on the company’s plan to spin-out PayPal and create a ‘lil shareholder value.

If you think 2015 estimates are achievable, EBAY is a cheap stock trading at a market multiple with expected double digit earnings and sales growth.  Investors don’t seem to care though, and have barely displayed any excitement about the plan for the company to spin out their faster growing PayPal division in a tax free transaction expected later in the year.

Here is one scenario that I think investors are not considering, the potential for a buyer for PayPal emerging as Apple’s PAY catches steam. There are no shortage of companies like Google, Microsoft, Yahoo, Facebook etc etc who could be in the market for a product to compete witu Apple Pay… not to mention a financial buyer like private equity.

I’ll go out on a limb and make a silly prediction. The spin out never happens and PayPal gets bought in 2015.

The one year chart below shows the fairly well defined, but tight range the stock has been in for the last two years between $50 and $58:

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

So how would you play this thesis?  

I would look to sell short dated calls to finance the purchase of longer dated calls as this thesis will need some time to play out.  At this point I want to wait for an entry after earnings as I see little upside to step in front of what could be weak forward guidance, and an entry back towards $50 would be ideal.

Gun to my head I would look to take advantage of the Vol differential between Feb and April, about 4 points.  With the stock at $53.75 I would probably buy the Feb / April 57.50 call spread for about .65 and look to close the short Feb strike and possibly turn April into a vertical call spread on a push higher.

At this point, with less than an hour to the print, I think Ill wait and see where it settles out before expressing a view.