EBAY is approaching its 2015 highs and important technical resistance at $58, now up 9% from the year lows on Feb 2nd and up 2% on the year:
The 1 year chart above is quite fascinating, as the stock has spent the better part of the last year between $48 on the downside, and $58 on the upside, with the stock’s 200 day moving average (yellow line) nearly right at the mid-point of that stated range. What is clear, the stock has been a buy at or below $50 and a sale near $58.
One trader today expressed a view that the stock would finally breakout. Just a bit ago when EBAY was $57.25, a trader sold 10,500 Jan2016 50 puts at 2.50 to open and bought the Jan2016 60/67.50 call spread 10,500x for 2.50, resulting in no cost for the spread. Here at RiskReversal hq we call this structure a call spread risk reversal. We love these sorts of trades for those who are comfortable being naked short puts, but whom also understand they are giving away potential upside.
Here is how this trade would work on Jan2016 expiration:
Profits, between 60 and 67.50 make up to 7.50, with max gain of 7.50 at 67.50 or higher (up 17.5%). For this size that would be $7.875 million.
Neutral: No gains or losses between 50 and 60
Losses: below 50, down about 13%
Prior to Jan2016 expiration this structure will result in losses on a mark to market basis as the stock trades lower towards the short put strike, and gains as trades higher towards the long call strike.
after the stock’s 9% rally since Feb 2nd, I much prefer this sort of trade in place of initiating a long stock position as I suspect the trader may be looking to catch EBAY’s tax free spinoff of their Paypal unit that is not likely to occur prior to the end of Q3. This trade could also be stock replacement as the trader is also very aware of the levels (laid out above) that the stock has traded between like clock work since the breakout in late 2012 to new all time highs:[caption id="attachment_51099" align="aligncenter" width="600"] EBAY 3 year chart from Bloomberg[/caption]
Personally I don’t love the timing of the entry, but I like the structure as it allows for an imperfect entry with plenty of time and a short put strike that appears to be an attractive entry level. I suspect it would take a lot of things to go wrong between now and Jan2016 (including a market meltdown) for the stock to be back at $50 given the potential catalysts of the PayPal spin and what should start to be rumors of interest for the unit on an outright basis.