Options Update: eBay Swarmed by Put Volume as Shares Extend Losses
This morning’s gains are evaporating quickly as the day wears on, with the technology sector’s boost from Intel’s in-line earnings report also wearing thin.
For online auctioneer eBay
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PowerRating) which failed to take part in the morning revelry, the losses are mounting faster than most. With no headline news to speak of, EBAY shares have fallen more than 3.5% at last check, with the stock clinging desperately to short-term support in the 13 region.
It is also expiration Friday, which means that it is time again to roll out those front-month positions into later-dated options. For eBay bears, the trade of choice appears to be the roll out of the January 2009 13 put into the February 12 put. Overall, more than 10,000 puts have changed hands on EBAY so far today, with more than half of this volume trading at the January 2009 13 and February 12 strikes. Today’s activity has placed the shares on our Intraday Volume Explosion List, but it was the potential of added positions at the 12 put that drew my attention this afternoon.
The Anatomy of an eBay Put Position
Looking at the chart above, you can see that practically all of EBAY’s February 12 put volume changed hands at the ask price. While volume at this soon-to-be front-month strike falls a bit shy of the 3,727 contracts already in residence, the fact that the majority of this activity is crossing at the ask price leads me to believe that we are looking at fresh buy-to-open volume for EBAY. As such, I will be running with a put-buying theme in today’s analysis.
Drilling down on the February 12 put, a block of 250 contracts traded at the ask price of $0.55 at 10:58 a.m. Eastern time. The total outlay for this position would be $13,750 — ($0.55 * 100)*250 = $13,750. For this trade to reach breakeven, EBAY would need to plunge about 14.8% to $11.45 per share from the stock’s Thursday close of $13.44 before the options expire on Feb. 20. The maximum loss on this position is limited to the initial investment of $13,750.
By entering this trade, the investor is indicating that he expects EBAY to plunge sharply in the coming weeks prior to February expiration. The position has started on the right foot, with the shares down more than 3% at last check, but there is still a long way to go before this trade reaches profitability. That said, let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.
Getting Technical
Looking at the stock’s technical performance for the past several months, it would seem that EBAY put traders are on to something. During the past 52 weeks, the shares have shed more than half of their value, as EBAY finds itself pressured steadily lower by overhead resistance at its 10-week and 20-week moving averages. This downtrend has stabilized a bit since the shares hit a low of $10.91 per share on Nov. 21, but overhead resistance at the 15 level appears to have thwarted any potential extension of this short-term rally. Additionally, EBAY is once again trading back below its downtrending 10-week trendline, making another test of overhead resistance at the 15 level less likely.
The Sentiment Drivers
Among EBAY’s sentiment indicators, only Wall Street analysts have recognized the stock’s poor prospects. Currently, 16 of the 22 brokerage firms following the shares rate them a “hold” or worse. However, there is room for price-target cuts from analysts, as Thomson Financial reports that the stock’s 12-month average target rests at $17.21 per share – a 32% premium to EBAY’s current trading range near $13 per share. Any downgrades from the lingering bulls or price-target cuts could spark additional selling pressure for the shares.
Despite the stock’s poor price action and warnings from analysts, options traders are betting on a bottom for EBAY. The security’s Schaeffer’s put/call open interest ratio (SOIR) of 0.39 indicates that calls more than double puts among near-term options. Furthermore, this ratio ranks just 4 percentage points shy of an annual low. This wealth of optimism on a technically struggling stock has bearish implications from a contrarian perspective.
The Verdict?
Looking at EBAY’s long-term downtrend and wealth of lingering bullish investor sentiment, the prospects of an extended decline in the shares looks all but certain. Personally, I like the idea of playing an EBAY put position, but an out-of-the-money strike is a little on the aggressive side. More conservative traders might want to consider a February (or April) 14 put to garner some more wiggle room in the trade should market tailwinds move against the position.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.