Options Update: eBay's New Low Spurs Option Players into Action

A daily feature available on SchaeffersResearch.com is "Options Update." Every day, we'll give a brief market overview and focus on one stock that is the center of some heavy option trading. The focus of today's feature is eBay.

While economic growth is typically a good thing, surprisingly strong numbers on the eve of a Federal Reserve meeting tend to prompt visions of a never-ending tightening campaign. The Conference Board said consumer confidence for June rose to 105.7, from an upwardly revised 104.7 in May, outpacing expectations for a slight decline to 103.1. Meanwhile, the National Association of Realtors said sales of existing homes dropped 1.2 percent in May. The decline was narrower than the 1.8-percent drop expected on the Street. The better-than-expected reports catalyzed some selling in the markets, as acute fears of stagflation (when the economy slows amid rising interest rates) suddenly reared their heads. In midday action, the major averages are trading near their intraday lows, with the Dow Jones Industrial Average (DJIA) dipping back below the 11,000 mark.

Most-Active Options Update

At 1:24 p.m. Eastern Time, the Dow Jones Industrial Average (DJIA – 10,960.7)has dropped 85 points, or 0.77 percent. The S&P 500 Index (SPX – 1,244.00) is lower by half a percent, and the tech-rich Nasdaq Composite (COMP – 2,112.1) has given back one percent, shedding 21 points . At 1:27 p.m. Eastern Time, 2,178,564 calls have changed hands compared to 1,501,251 puts, equaling a single-day put/call volume ratio of 0.68. The CBOE's equity put/call volume ratio weighed in at 0.77.

eBay

eBay (EBAY: sentiment, chart, options) shares are taking it on the chin today, dropping more than three percent to register a new 52-week low. Today's Wall Street Journal reported that Google (GOOG: sentiment, chart, options) is scheduled to begin testing an online payment service that could offer direct competition for EBAY's PayPal unit. EBAY watchers should have expected this development, which has been talked about for several months. The oligarch of online auctioneering last appeared on our site earlier this month, when Jocelynn Drake covered EBAY in her June 14 edition of Upon Further Review. At that time, EBAY was trading just above the 30 mark but was "facing some serious overhead resistance against any moves to the upside," due in large part to structual resistance overhead at the 32.50 strike.

The equity's recent pullback has also brought it beneath the 30 strike, which previously represented possible put support. With the shares in new-low territory, this level now reverses roles and may act as resistance. In the July series, there are more than 21,000 call contracts at the 30 strike, not to mention the more than 27,000 contracts on the 32.50 call.

The 30 strike is also the site of heavy action in today's session, as speculators have piled into the August 30 call (XBAHF). What's more, these are likely to translate into new open interest. By midday, almost 10,000 contracts had traded at this strike, but fewer than 1,000 contracts are already in residence. It is possible that today's action could consist of roll-outs from the July series, but this is not likely. Volume in the front-month stands at just 7,300 contracts, and July expiration isn't for another three weeks.

Blocks of all shapes and sizes have been trading in rapid succession on the call all morning. The largest trade was a block of 1,370 contracts that went off at the ask price of $1.40 per contract at 11:09 a.m. This block alone was worth about $190,000.

I've already mentioned that EBAY pegged a new annual low, so its charts aren't likely to look very pretty. Indeed, the stock has been in steady decline mode since the beginning of the year, shedding nearly 40 percent of its value beneath resistance from its 10-week and 20-week moving averages. The equity's most recent downleg brought it beneath potential technical support at the 32 mark and took it to levels not visited since December 2003.

One final hope for EBAY could be its 80-month moving average, which is just coming into existence and could lend some support around the 27.50 level. But even if this trendline manages to hold off any continued declines, any promising upside at this juncture doesn't appear terribly likely, given the double-tiered resistance in play from strike prices and moving averages.

EBAY certainly won't be getting much help from the short-selling community. Number for June are finally in, and the auctioneer boasts a short-interest ratio of 2.2 days to cover. In other words, not enough to scare up a short-covering rally of any magnitude, even if the stock were to bound higher from its annual lows.

Zacks reports that nine of the 19 analysts following EBAY rate the stock a "buy" or better, which seems a bit slanted given the equity's recent new low. While the eight "hold" ratings or two "sells" theoretically represent possible upgrades, the case for downgrades is more compelling. EBAY currently earns a Schaeffer's Equity Scorecard rating of 1.0, which suggests that today's new low may not be an ultimate bottom for the shares.

** The tables below reference notably active call and put contracts across all six exchanges.**