New Bullish Put Spread Targets eBay

04/06/2012 8:00 am EST

Focus: OPTIONS

Karee Venema of Schaeffer’s Investment Reserch decodes a bullishly biased option trade on eBay (EBAY), which is betting on positive earnings news to keep the stock at or above current levels at expiration.

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Options traders have been showing a penchant for calls over puts on eBay Inc. (EBAY) lately. The stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.64 ranks lower than 85% of other similar annual readings. In other words, near-term traders are more call-heavy than usual toward the stock.

This preference for calls was exhibited in Monday’s session, with roughly 11,000 contracts crossing the tape, compared to around 2,800 puts. Not all of these put players are pessimists, though, as it appears some of these contracts have been used to construct a bullishly biased credit spread in the front-month series.

See related: Understanding Debit and Credit Spreads

Specifically, one block of 500 April 29-strike puts changed hands at the ask price of $0.04, while a symmetrical block of 500 April 34-strike puts traded near the bid price at $0.32 apiece, resulting in a net credit of $0.28.

The ultimate goal is for EBAY to remain above $34 through April expiration, leaving both legs to expire worthless, and allowing the investor to pocket the full potential profit of $0.28. However, the trader will break even as long as EBAY keeps its head above $33.72 (sold strike minus net credit) over the next three weeks.

The short put spread strategist certainly has a handle on EBAY’s technical backdrop. For starters, the stock has not experienced a daily close below $34 since Feb 15. From a longer-term perspective, the equity has tacked on 21.7% on a year-to-date basis. Highlighting the security’s run up the charts has been its 32-day moving average.

However, these option traders are feeling the pinch in the last few days, as the stock has moved down toward its 50-day moving average.

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As it turns out, the last time the stock closed a session below its 32-day moving average was Jan. 18—the day before better-than-expected earnings propelled the security higher. Today’s spread strategist may be keeping an eye on EBAY’s fundamentals, as well, with the online auctioneer tentatively scheduled to step into the earnings confessional on April 18. Another promising report could send the shares higher ahead of front-month expiration.

Despite paring some earlier losses, EBAY was trading fractionally lower. While the aforementioned credit spread offers a smaller reward than if the trader had sold the put outright, the maximum possible risk is limited to $4.68 (the difference between the two strikes minus net credit) should the stock edge lower over the next three weeks.

By Karee Venema, contributor, Schaeffer’s Investment Research

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