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eBay Inc (EBAY) Traders Call a Bounce After Thursday's Bear Gap

The bulls expect EBAY to reach uncharted territory by October

by 7/19/2013 2:44 PM
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After reporting disappointing quarterly earnings and full-year guidance on Wednesday evening, eBay Inc (NASDAQ:EBAY) gapped southward nearly 7% yesterday. That descent is continuing today, as the Internet auction house is down another 1.5% to trade at $52.73. Nevertheless, that's not stopping option players from betting on a strong rebound over the coming months.

In view is the October 65 call, which is eBay's most active option so far, on a day in which calls are being exchanged at roughly a 1.5-to-1 margin relative to puts. Over 7,000 contracts have traded at the strike, including three large blocks of between 1,985 and 2,883 contracts each. Almost all the calls traded at the ask price, indicating they were purchased at a volume-weighted average price (VWAP) of $0.18. Plus, with implied volatility ticking higher, it's likely the transactions are of the buy-to-open variety.

In order to profit from the trade, eBay must spike to $65.18 (strike price plus VWAP) by October expiration. That's nearly a 24% gain from where the shares currently find themselves, and happens to be an all-time high for an equity that's never traded above $60. Even if the security continues to languish, though, the most at stake is the premium paid.

Today's option bulls aren't alone in their optimism. Among brokerages covering EBAY, 24 out of 31 rate it a "buy" or better, 20 of which are "strong buys." By contrast, there are just seven "holds" and not a single "sell" or worse evaluation to be found. If that's not enough, the consensus 12-month price target for the shares is $63.44, which -- again -- is uncharted territory for Amazon.com, Inc.'s (NASDAQ:AMZN) sector peer.

From a technical standpoint, it doesn't appear that eBay has what it takes to make such a steep move. The stock is up just 3.4% year-to-date, which is about 15 percentage points short of how the broader S&P 500 Index (SPX) has performed. Moreover, in 2013, a layer of resistance between $57 and $58 has repeatedly rebuffed the shares' rallies.

Given that technical turmoil, eBay Inc (NASDAQ:EBAY) could encounter additional downside in the weeks and months ahead, as the Wall Street bulls change their opinions, and the equity gets slapped with additional price-target cuts and downgrades .


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