A Cash-Secured Put Trade on eBay (EBAY)

05/12/2010 9:07 am EST

Focus: OPTIONS

eBay Inc. (EBAY) shares closed down on the day Monday, which incidentally was the Dow Jones’ largest one-point jump in more than a year. Today, EBAY shares are moving slightly higher. EBAY was not the only stock to finish the day down yesterday, and the $21.50 level offers strong support.

The online auction company met earnings expectations on April 21, but has seen their stock price cut by $5, or 18%, since its March highs. This might be a buying opportunity. Options traders can use the cash-secured put as a stock acquisition tool and to lower their cost basis.

EBAY Cash-Secured Put Trade Details (All prices are from time of writing—be sure to update with current prices)

EBAY shares are trading around $22.35

Cash-Secured Put

  • Sell the June 21 put (out of the money) for $0.58 per contract (or better)

  • Net credit of $0.58 ($58 per lot)

  • For every contract, set aside $2,042 (space) in cash: [(21 – 0.58) x 100]

Securing the sold put with cash means the capital is available to buy the shares if assigned. At this point, you’ll have purchased EBAY shares at an effective price of $20.42, or roughly 8% less than they are currently priced.

chart
Click to Enlarge

Profit/Loss Details

Maximum Potential Profit: $0.58 per contract (the premium collected) minus Click Herecommissions. (This profit is for the short put option only and may change if the investor opts to buy the stock at $20.42).

Maximum Risk: $20.42 (strike price minus the premium collected). Return on risk for this trade is approximately 2.8%.

Breakeven: $20.42 (strike price minus the premium collected).

By the Staff at ONN.tv

Find other option trading ideas at ONN.tv

Related Articles on OPTIONS