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eBay Bear Bets On a Near-Term Drop

EBAY is dawdling just south of new-high territory

by 6/12/2012 9:32 AM
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Online auctioneer eBay Inc (EBAY - 40.93) has spent the last few months dancing beneath the $42 level, which happens to mark a six-year peak. However, one speculator -- or institutional trader, perhaps -- is betting on the equity to head south within the next several weeks.

By Monday's closing bell, EBAY had seen roughly 25,000 puts change hands -- more than twice the norm. The majority of the action was attributable to a bear put spread, where the investor bought 10,000 July 41 puts for $1.41 each, and simultaneously sold 10,000 July 29 puts for $0.09 each, resulting in a net debit of $1.85 per pair of puts. In order to profit on the play, the trader needs EBAY to retreat beneath the $39.15 level (bought put strike minus net debit) within the options' lifetime. However, while the sale of the out-of-the-money puts trimmed his breakeven rail and his initial cost -- which represents the maximum risk -- it also caps his maximum profit at $10.15 per pair of puts, no matter how far EBAY should sink beneath the $29 level.

Despite outperforming the broader S&P 500 Index (SPX) by nearly 17% during the past 60 sessions, yesterday's bearish betting was just par for the course for EBAY. In fact, the stock sports a 10-day put/call volume ratio of 1.75 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), indicating that traders have bought to open almost two puts for every call during the past couple of weeks. What's more, this ratio stands just six percentage points from a 52-week peak, suggesting options buyers are initiating pessimistic positions at a near annual-high clip.

Meanwhile, short interest skyrocketed by 67.4% during the past month, further reflecting a growing bearish bias on Wall Street. Nevertheless, short positions still represent less than 1.5% of the stock's total available float, suggesting the bearish bandwagon is still far from crowded.

On the other hand, the brokerage bunch is – unsurprisingly – bullishly biased toward the outperformer. Currently, EBAY boasts 14 "strong buys" and two "buy" ratings, compared to eight "holds" and not a single "sell" rating. What's more, ThinkEquity just yesterday upped its price target on the security to $47 from $44 and reiterated its "buy" endorsement. However, should EBAY retreat from resistance in the $42 region, an unwinding of optimism via downgrades could translate into a contrarian headwind for the shares.

Weekly Chart of EBAY since November 2011


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