Back in late February, I detailed a bullish view on eBay (EBAY) when the stock was $37.50:
eBay been in the news of late, in the next month or so a $4 billion deal to sell StubHub should close, and now, they are in the process of receiving interest in their international classifieds ads biz that some see could net them $10 billion, and last month NYSE owner ICE supposedly considered buying the company as they are interested in their core marketplace business.
eBay as a $30 billion market cap, $3 bil in cash and $8 bil in debt… there are two activists involved and an interim ceo…a takeover could be in the cards with these two non-core businesses gone…
If you agree where there is smoke there may be fire, and the greater success activists have with an interim CEO to sell non-core businesses, growing their cash hoard, making the company a more attractive take0ver candidate by private equity, or a strategic, then consider buying intermediate-term calls…
Bullish Trade Idea: EBAY ($37.50) Buy June 40 for 1.30
Break-even on June expiration:
Profits above 41.30, up 10%
Risks 3.5% of the stock price.
Two weeks ago on April 22nd, prior to eBay’s Q1 earnings, I updated this view:
Well, the stock got nailed, going straight to $26 from $38, but has since come all the way back.
What’s interesting about this trade idea is that this June call was nearly worthless at the March lows, but now is actually worth more than on Feb 25th with the stock at the same price.
And there is a simple reason for that, the rise in options prices has offset the nearly two-month decay in time value.
At this point, it might make sense to consider trade managment…. either take this one off the sheets (consider it our bailout of bad timing), spread by selling a higher strike call in June to reduce the premium at risk, or roll up and out to a call spread.
Now the stock is $41.50 and the June 40 call is worth $2.64, this has been a fairly extraordinary journey for the price of an option, being near worthless within weeks of initiating the position and then gaining 3600% from the lows.
That is the power of leverage… on both sides of the trade.
The two-year chart of EBAY is fairly remarkable, having stopped on March 23rd at its recent lows within 1 penny of December 24th, 2018 lows, and now having raced all the way back to a new 2020 high and with 50 cents of its 52-week high at $42:
After the stock’s recent volatility, down 33% and now up nearly 60% in less than three months I am hard-pressed to see the stock having enough momentum approaching the prior high to establish a new range above $42.
But EBAY is a cheap stock trading 13.6x expected 2020 eps growth of 8% and 12.4x expected 2021 eps growth of 9% despite sales expected to decline 10% this year. I would add that EBAY person to person model, that will lack controls on sanitization etc in this pandemic world we now live in night face greater headwinds than other marketplace models of the time being.
Short-dated options prices in EBAY have come down considerably from their recent implied volatility highs near 90%, but are likely to remain in the low 30s to high 20s percents for the time being:
If I were inclined to play for a rejection at technical resistance and a pullback to the mid $30s in the coming months I might consider the following put spread in July:
Bearish Trade Idea: EBAY ($41.50) Buy July 40 – 35 put spread for $1.25
-Buy to open 1 July 40 put for $2
-Sell to open 1 July 35 put at 75 cents
Break-even on July expiration:
Profits of up to 3.75 between 38.75 and 35 with a max gain of 3.75 below 35
Losses of up to 1.25 between 38.75 and 40 with a max loss of 1.25 above 40
Rationale: this trade idea risks 3% of the stock price, has a break-even down 6.6%, and has a profit potential of up to 9% if the stock is down 15.5% in two and half months. The options market is currently projecting a 30% chance this trade is break-even and a 16% chance it has the potential to be at a max value on July expiration.
On the flip side, if you are inclined to play for a breakout later in the year, but think the stock could consolidate below technical resistance, then consider a call calendar, for instance:
Bullish Trade Idea: EBAY ($41.50) Buy June – Oct 42 call calendar for $2
-Sell to open 1 June 42 call at $1.50
-Buy to open 1 Oct 42 call for $3.50
Break-even on June expiration:
The ideal scenario is that EBAY is near 42 on June expiration and the short 42 call expires worthless or can be covered for a small amount and you are left long Oct 42 call for $2 or about 5% of the stock price.
The max risk of the trade is $2 on a sharp move lower than current levels or a sharp move above the $42 strike price by June expiration.
Rationale: this trade idea risks about 5% of the stock price and allows to leg into some upside exposure over the coming months. To my eye, $42 appears to be massive technical resistance and the stock has come very far in a short period of time and could use some time to consolidate recent gains.