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TheStreet Open House

EBAY: Ready to Catch a Bid?

eBay (EBAY; $28.75) began as one great modern idea that became one excellent modern corporation. The stock "IPO'd" in 1998. EBAY's early years of hyper trading have morphed into the mature stock it has become. No longer does the stock have a mega-high beta (1.37) with this year's low of $27 and the high $35 means $30 has become the fulcrum.

EBAY does own PayPal, an acquisition that has paid off in excellent fashion for EBAY! EBAY basically has zero debt as its cash on hand exceeds its total debt by over $1.5 billion. Thus management can be understood as prudent, and somewhat conservative.

Technically, I will leave EBAY to T3 to discuss, with the only addendum to their excellent analysis is that I have EBAY coiled. Thus, I am expecting a higher volatility in the stock over the next several weeks.

Fundamentally, I have EBAY only growing at a 10% annual rate of return in this current quarter. Trading at 20X P/E, that 10% growth makes the stock quite rich as this time. However this current quarter also ends its fiscal year which should show growth year- over-year over 15%. Should that become fact, that tempers the big differential between the P/E ratio and the actual rate of growth for EBAY.

Let's review the T3/OP video with Jill and Scott before we get into the trade:



The trade set up I prefer for EBAY at this time is the bullish call vertical spread as it controls risk 100%. In addition, the sale of the out-of-the-money call part of this type of spread helps pay for the decay on the long call side of the spread.

This trade does have medium reward potential, though the gain potential is capped due to that same short call involved.

Consider a bullish vertical call on EBAY that expires in January.

Trades: Buy to open 3 EBAY January 28 calls for $2.50 and sell to open 3 EBAY January 33 calls at $0.50.

The total risk for the spread is the premium paid, or $2.00. Given the fact that EBAY is $0.75 in-the-money relative to this spread, the risk is nicely exceeded by the reward potential.

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