Options Update: Option Players Issue Their Bids on eBay

• July 16, 2008
• Mark Fightmaster

Confession Time

We’re all friends here, right? Well, I have a confession to make: I’m a shoe-aholic (I may have mentioned this in the past). I think it dates back to my college days (all 8 years of them), when I was working my way through school at a “big box sporting goods” retailer (no names mentioned to protect the innocent). Unfortunately for me, shoes are one of the college habits that I have proven unable to break … curses Nike, Adidas, Converse, and Puma!! (Christmas Hint for my Faithful: those are my brands of choice, I wear a 12, and like the retro vibe) Well, one thing has led to another, with my addiction for shoes leading to an addiction to eBay
. I’ll check out the latest kicks in my size before I retreat to the Fightcave for my night’s rest – prompting the spouse to ask me why I am online since I spend all day on the computer (to which I really have no answer).

My point (other than the rampaging need for an intervention)? I’m not sure, but it was a fun way to get something off my chest while introducing EBAY as today’s focus stock. We have covered EBAY recently, with Nick Perry noticing today’s skew towards puts and Jocelynn Drake summarizing the critical juncture facing the firm ahead of earnings. That earnings report follows the closing bell today, making both of those articles required reading – and prompting heavy option activity. It is this pre-earnings activity that caught my eye today.

According to today’s Intraday Volume Explosion List, it certainly seems as if the bears are lining up to express their opinions on the baron of bids. The equity has seen 22,328 total puts trade today, more than 5 times the norm. Well more than half of these puts crossed on the July 27.50 put (QXB SY), which has seen volume of 17,256. With earnings this afternoon, I’m guessing that we are dealing with new positions – but are they purchases or liquidations? Let’s see.

It’s tough to tell when none of the transactions number 4 digits – indicating individual investors jumping in ahead of a news event. What is significant is potential put support at the 27.50 level. The shares are flirting with this region thanks to a 2% gain. If the stock manages to overtake and close above the 27.50 level, we could see it act as support. That said, I want to revisit something that Jocelynn noted on Monday: “The heavy preference for calls also shows that investors are anticipating a sharp rally in the shares following their earnings announcement.” Although the 27.50 level is important and could provide support, there may be too much positive sentiment to withstand.

Bidding on Better Times

Sentiment from option players and analysts reflect the assertion made by Jocelynn. According to Zacks, EBAY receives 8 “strong buys,” 3 “buys,” and 5 “holds.” Again, Jocelynn noted the bullish nature of these ratings and the danger that it poses ahead of earnings – but it does set up a nice situation for a fast aggressive move in the right direction. How? Disappointing earnings are often accompanied by downgrades and/or price-target adjustments. At last check, there is plenty of opportunity for price-target adjustments, as the consensus pegs the 12-month target at $34.36.

Turning to option players, the chances for that fast aggressive move in the right direction are possibly even higher. EBAY’s Schaeffer’s put/call open interest ratio (SOIR) of 0.52 indicates that calls outnumber puts 2-to-1 in the front-3-month option series. Furthermore, this reading is lower than 94% of those taken during the past 52 weeks. This optimistic sentiment could unwind rapidly following disappointing earnings … no stock likes an option player scorned.

Bidding for Trouble

When Jocelynn covered EBAY, she looked at the prowess of the equity’s 10-day and 20-day moving averages and how this duo has provided resistance on a rather consistent basis. Although the stock is trading above these trendlines this afternoon, it doesn’t mean that they will act as support. In fact, history indicates that closes above these trendlines are often followed by periods of continued weakness.

Furthermore, there is a technical hint that EBAY may continue to struggle. The root of my shoe addiction saw its 10-week moving average bearishly cross its 20-week counterpart. This technical formation is often the harbinger of continued price weakness. Often is a key word, as the stock could snap back to life thanks to outstanding earnings. However, more often than not, a bearish cross precedes price weakness. A bearish cross combined with poor earnings could be quite a battle for the stock to fight.

The bearish cross on a weekly chart isn’t the only one for EBAY. The sultan of selling your stuff saw its 10-month and 20-month moving averages recently complete a similar formation. The one caveat is potential support in the 24-26 region, as it could hold and allow the stock to rebound.

The Verdict? The cards are certainly stacked against EBAY heading into this afternoon’s earnings report (please note, this is not a prediction of what will happen). Optimism runs high (don’t believe me? Check out this MarketWatch article), the stock is in a downtrend, and the economy is weak – suggesting EBAY’s sales could reflect poorly. The stock is set to make that rapid move that option players look for … but in which direction? Stronger-than-expected results could bring EBAY face-to-face with various layers of resistance, while poorer-than-expected results could send the stock spiraling lower. We will soon find out; bidding on this item ends in roughly 3 hours and 30 minutes.

If you have any questions or comments, make sure to email me. I will do my best to answer your question or address your concern.

Want more of my thoughts on the market? Don’t like my views and want to see those of my colleagues Andrea, Elizabeth, Jocelynn, Colleen, or Joe? Make sure to check out our Schaeffer’s Daily Market Blog section throughout the trading day.

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