Schaeffer's Trading Floor Blog

A Pre-Earnings Options Preview for eBay Inc (NASDAQ:EBAY)

EBAY is slated to take its turn in the earnings confessional after tomorrow's close

by 10/15/2013 10:52 AM
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As eBay Inc (NASDAQ:EBAY) prepares to unveil its quarterly earnings report after tomorrow's close, bullish speculators have been flooding its options pits. During the past two weeks, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 35,102 calls on EBAY, compared to 7,795 puts. The resultant 10-day call/put volume ratio of 4.35 (up from its month-ago reading of 1.96) ranks higher than 92% of similar readings taken within the last 12 months, meaning long calls have been initiated over long puts at a near-annual-high clip of late.

Expanding the time frame out to 10 weeks yields similar results. Specifically, the stock's 50-day call/put volume ratio on the ISE, CBOE, and PHLX stands at a call-skewed 3.32. What's more, this ratio ranks in the 98th percentile of its annual range, indicating calls have been bought to open over puts with more rapidity just 2% of the time within the past year.

Against this bullishly biased backdrop, Schaeffer's put/call open interest ratio (SOIR) for EBAY rests at 0.40. Not only does this show that call open interest more than doubles put open interest among options expiring in three months or less, but it ranks lower than 96% of other such readings taken in the last 12 months. Simply stated, short-term speculators have rarely been more call-heavy toward the equity throughout the past year.

In the front-month series -- which expires at this Friday's close -- EBAY optimists have paid particular attention to the October 55 call, where almost 8,000 contracts have been added over the past five sessions. This near-the-money strike is now home to peak call open interest in the October series, and the majority of the 35,473 contracts that reside here have been bought to open. In other words, speculators expect the security to rise 1.5% from its current perch at $54.17 by week's end in order to tackle the $55 mark.

Sentiment is upbeat outside of the options pits, as well. No fewer than 24 "buy" or better recommendations are levied upon the stock, compared to seven "hold" suggestions, and not a single "sell" or worse. Meanwhile, the consensus 12-month price target of $63.41 sits in uncharted territory for EBAY.

The high expectations directed toward the equity are a bit surprising, considering EBAY has spent the lion's share of the past year churning in the $50-to-$58 range. This muted price action has translated into a slim 7% year-to-date advance. Should the security continue to struggle on the charts, an unwinding of the bullish sentiment surrounding the stock could translate into contrarian headwinds in the near term.

Similar to sector peer Yahoo! Inc. (NASDAQ:YHOO), though, EBAY tends to perform well in the sessions following its quarterly earnings report, averaging a gain of 2.2% and 1%, respectively, in the subsequent day and week. For eBay Inc's (NASDAQ:EBAY) third quarter, Wall Street is calling for a profit of 63 cents per share -- an 8-cent improvement over its year-ago results. As a point of reference, the online auctioneer has matched or exceeded analysts' bottom-line estimates in each of the last eight quarters.

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