) -- Options action in
during midday trading suggests an investor sold a hefty number of later-dated calls to protect against a potential slide in the stock.
eBay shares are currently down 10 cents to $26.94 without any news to drive the slight drop so far on the day. The company reached a 52-week high of $28.37 on March 25, but the stock has since sold off roughly 5%.
eBay is due to announce earnings on April 21 after the market closes, and analysts estimate earnings of 41 cents a share. Judging from the call volume that crossed the tape a few hours ago, one investor could be betting that eBay shares will not climb much higher during the next three months.
At 10:51 a.m. EST, 7,000 out-of-the-money July 29 calls changed hands for the bid price of 93 cents per contract, indicating investors likely sold these options on a bet that eBay stock could stay below $29.93 (the breakeven price) prior to July options expiration.
These calls are home to current open interest of 1,100 contracts, which means investors traded the majority of the options to open. Investors could make a maximum profit of 93 cents on this short call position if eBay shares hit a ceiling at the breakeven price. This strategy accounts for a potential 10% rally in the stock before investors begin to lose money (maximum losses are theoretically unlimited if eBay shares climb significantly).
While this options action suggests investors are bearish on eBay, a close look at time and sales suggests investors sold the calls to finance a stock purchase. This means the investor is long eBay, but protected the long stock position by selling upside calls. Implied volatility of the July 29 calls is 31% compared to the stock's 30-day historical volatility of 23%.
-- Written by Jud Pyle
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."