An initiation of “Outperform” for NASDAQ constituent eBay (EBAY) from boutique brokerage Keefe Bruyette is off to a technically strong start with shares up 4.70% near 42.60 and atop the Naz’ 100 Percent Leaders board. With a broad, intermediate-based market follow-through day signal delivered on Friday for the larger tech-heavy index, Monday’s breakout in EBAY from a tight, 8-week long flat base is more promising than otherwise as shares strike their best levels in more than six years’ time.
Option traders have been busy, appreciative beavers or umm, hedge hogs with a likely bullish bias. Entering the second half, more than 36,000 contacts have traded compared to eBay’s 50SMA of 12,400. Calls are finding favor by a narrow margin with a current put/call reading of 0.75. Implieds are in the low 30s which is mostly in the lower quartile of pricing for the past couple years, while similar statistical or underlying price volatility keeps those premiums mostly on par with fair value.
Most active on the board, roughly 85% of today’s volume is in the July contract which just took up residence as the front month following Friday’s June expiration. Concentrated efforts can be seen in the surrounding money 41, 42, 43 and 44 strike calls and puts, but larger open interest tallies in most of those contracts means we’re less certain of traders motives. There remains five weeks of life in the July contract, but already at 32 calendar days, long premium plays are fast approaching increased theta risk.
Vega or implied volatility is bound to eventually makes its way higher in July as earnings are slated for the 18th and exactly one month out. However, buying a volatility rush on that basis would be prone to failure right now as it’s historically too soon to compensate the trader with a rise in implieds which will overpower decay risk for the period held.
Figure 1: eBay (EBAY) 4x July 42 / 45 Bull Call
Shown above and to illustrate one strategy which reduces some of the decay risk facing a bull wishing to trade the July contract, is a 4x July 42 / 45 Bull Call or Vertical spread. We’ve positioned this one to reflect 2.5% portfolio risk for a $20K model portfolio. This particular vertical will need shares of EBAY to continue higher in order to profit as it maintains an expiration breakeven of 43.30. But, given today’s bullish technical feedback and the broader market now cooperating with Friday’s FTD, accepting that eBay will need to continue holding successful auctions in its shares, seems an approachable one.
Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
