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Online marketplace eBay Inc (NASDAQ:EBAY - 47.51) has been quite a standout on the charts in 2012, jumping 58% year-to-date. In fact, EBAY has outperformed the broader S&P 500 Index (SPX) by more than 10 percentage points over the past three months. And on Sept 14, the shares leapt to a more than seven-year best of $50.65. However, this impressive price action hasn't deterred a recent wave of skepticism in the options pits. Throughout Tuesday's session, approximately 24,000 puts crossed the tape, reflecting three times the equity's average daily volume. For comparison, 10,000 fewer calls were traded yesterday.
Digging deeper, we find that a large block of 10,000 October 45-strike puts was traded near the bid price of $0.43, suggesting it was sold. Meanwhile, another block of 5,000 October 48-strike puts was traded at the ask price of $1.38, indicating it was bought. Open interest increased at both strikes overnight, confirming that a new position was established. Since the number of sold puts doubles the number of bought puts, this activity implies the initiation of a ratio vertical spread.
In this moderately bearish strategy, the speculator is betting that the stock will finish at $45 by the time the options expire in October. Because the spread was established for a net debit of $0.52, the maximum profit per spread is limited to $2.48 -- or the difference between the strike prices, minus the net debit paid. At the other end of the spectrum, however, the maximum risk depends on which path the shares take. If the underlying moves above the top breakeven rail of $47.48 (bought put strike minus net debit), risk is contained to the net debit paid. Should the stock breach the lower breakeven rail of $42.52 (sold put strike minus maximum profit potential), risk is unlimited down to zero, because half the sold puts are "naked."
Elsewhere on the Street, there appears to be a growing appetite for EBAY puts, despite the stock's overall uptrend. The Schaeffer's put/call open interest ratio (SOIR) checks in at 0.98, registering in the 84th percentile of its annual range. This implies that near-term options players have been more put-heavy just 16% of the time during the past year.
At last look, EBAY is trading in the red, staring up at the $48 mark and testing the support of its 32-day moving average. The stock appears to be ignoring a bullish brokerage note from Baird this morning. Specifically, the firm lifted its price target to $58 from $47, which is in territory not traveled by EBAY since January 2005, and represents a premium to the stock's average 12-month price target of $50.44.
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