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Option Bull Makes Huge Wager On eBay Inc (EBAY)

One trader is employing a long call spread strategy on eBay Inc

by 4/8/2014 2:27 PM
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Option Brief: eBay Inc (NASDAQ:EBAY) shares have charged 3.1% higher this afternoon to $54.57, on reports that the company's March same-store sales increased 17.8%. As such, options are trading at a faster-than-usual pace -- especially on the call side, where volume triples the expected intraday average.

In focus today are EBAY's May 55 and 60 strikes, where a two-legged transaction transpired just minutes after the opening bell. Ten thousand contracts were exchanged near the ask price at the lower-strike call (suggesting they were bought), while a matching block traded near the bid price at the higher-strike call (suggesting they were sold). According to Trade-Alert, both lots were opened as part of a long (bull) call spread.

By initiating positions at the near-the-money strike, today's headline trader expects EBAY to maintain its upward momentum and finish north of $55 at May options expiration. Meanwhile, by selling the 60-strike calls, the speculator reduced his cost of entry; however, he also gave up the theoretically unlimited profit potential of a "vanilla" long call position.

To put matters simply, if EBAY hits $60, the trader reaches his maximum profit potential -- that is, the difference between the strikes, less the initial net debit. On the other hand, if the shares remain below $55 through options expiration, the speculator will sacrifice the entirety of the initial net debit.

Earlier today, eBay Inc (NASDAQ:EBAY) bounced off of its 80-day moving average, which emerged as support in late 2013. Looking ahead, the firm is slated to report first-quarter earnings after the close on Tuesday, April 29. EBAY has matched or exceeded analysts' consensus bottom-line estimates in each of the past eight quarters, resulting in an average gain of 1.8% in the subsequent session.


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