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eBay Put Sellers Eye Support Ahead of Earnings

Option players descend on EBAY's November 44-strike put

by 10/12/2012 1:15 PM
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Puts are the options of choice on eBay Inc (NASDAQ:EBAY - 47.73) in today's session. More than 5,600 put contracts have crossed the tape, representing about a 14% rise from its average daily put volume. Meanwhile, fewer than 5,200 call contracts have changed hands, about three-quarters of what is expected.

Traders are eyeing the November 44-strike put, which has seen around 1,900 contracts trade. The majority of these have crossed at the bid price, and volume is easily outstripping open interest, indicating new positions are being sold to open here today. By writing these puts to open, speculators are hoping EBAY remains north of the $44 mark through November expiration, allowing them to pocket the full potential profit of $0.64, which, according to Trade-Alert, is the volume-weighted average price.

With EBAY's quarterly earnings announcement less than a week away, implied volatility has soared. The stock's sports a Schaeffer's Volatility Index (SVI) reading of 51%, which ranks in the 90th percentile of its annual range. Additionally, implied volatility on the November 44-strike put is currently inflated in relation to its 40-day historical (realized) volatility (36% vs. 25.3%), making now a prime time to sell premium on EBAY's short-term options.

From a wider sentiment standpoint, though, calls have been preferred over puts. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 2.64 calls for every put during the last 50 sessions. Plus, this call/put volume ratio ranks higher than 92% of similar readings taken in the last year, indicating a distinct inclination toward bullish bets over bearish among option traders.

This optimistic outlook is being echoed outside of the options arena, as well. No fewer than 21 out of 30 analysts maintain a "buy" or "strong buy" recommendation toward the stock, with not a single "sell" to be found.

For a stock that's added more than 57% on a year-to-date basis, this bullish stance toward EBAY is justified. Plus, the company's last two turns in the earnings confessional prompted respective 11.7% and 9.6% pops in the following sessions. Also, to the delight of the aforementioned put writers, EBAY's mid-July consolidation attempt was caught by its 20-week moving average, which is currently located in the $45 neighborhood.

As touched upon, the online auctioneer will unveil its third-quarter earnings results after the market closes on Wednesday, Oct. 17. The company has bested bottom-line estimates in each of the last four quarters. Wall Street is calling for a per-share profit of 54 cents.

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