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eBay Options Fly Off the Shelves

EBAY's options are hot ahead of earnings

by 10/17/2012 11:25 AM
Stocks quoted in this article:

Option traders are targeting eBay Inc (NASDAQ:EBAY - 48.42) today, with both calls and puts picking up steam. At last check, the online auctioneer has already seen roughly 14,000 calls and 11,000 puts change hands, far surpassing its average intraday volume of around 5,100 calls and 3,400 puts.

On the call side, both short- and long-term traders have honed in on the out-of-the-money 50 strike. Specifically, the stock's October 50 and January 50 calls have seen about 2,700 and 2,000 contracts traded, respectively. The bulk of the calls have crossed at the ask price, and implied volatility is trending higher on both strikes, hinting at buy-to-open activity.

The volume-weighted average price (VWAP) of the October-dated calls is $0.69, meaning the buyers will profit if EBAY topples the $50.69 level (strike plus VWAP) by the end of the week. Considering the company is slated to unveil its quarterly earnings report after the closing bell tonight, these traders are likely gambling on a post-earnings surge for EBAY. Meanwhile, the VWAP of the January-dated calls is $2.43, thanks to their added time value. As such, the call buyers will reap a reward if EBAY surmounts the $52.43 level within the next few months.

On the flip side, option bears appear to be establishing new positions at the October 45 put, which has seen over 1,400 contracts traded -- mostly at the ask price. Plus, implied volatility on the soon-to-expire put was last seen more than six percentage points higher, underscoring our theory of newly added bearish bets. The VWAP of the puts is $0.28, indicating a breakeven level of $44.72 (strike minus VWAP) for the pre-earnings skeptics.

Thanks to escalating demand ahead of earnings, EBAY's front-month options are relatively expensive at the moment. In fact, the stock's Schaeffer's Volatility Index (SVI) has risen to 36% -- above more than half of all other readings of the past year. Or, simply put, EBAY speculators are paying a pretty penny for short-term option contracts.

From a broader sentiment standpoint, EBAY calls have been more in-demand than their put counterparts. Over the past 50 sessions, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 2.45 calls for every put on the equity. What's more, this ratio registers in the 87th percentile of its annual range, suggesting option buyers have initiated bullish bets over bearish at a much faster-than-usual clip recently.

Echoing that optimism, EBAY boasts 16 "strong buys" and five "buy" endorsements from analysts, compared to nine lukewarm "holds" and not a single "sell" or worse rating. Likewise, the average 12-month price target on the stock sits at $52.06 -- in territory not charted since early 2005.

Technically speaking, it's not surprising to find most of Wall Street in the bulls' corner. The shares of EBAY have muscled roughly 59% higher in 2012, ushered into the black atop their 10-week moving average, which has ascended into the $48.40 neighborhood.

In the same vein, the firm's earnings history could also be a driver behind the optimism among options traders and analysts. According to Thomson Reuters, EBAY has topped the Street's bottom-line earnings estimates in each of the past four quarters.


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