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Option Traders Bet On Additional Gains for Uptrending eBay

Calls were the options of choice on EBAY yesterday

by 1/3/2013 10:27 AM
Stocks quoted in this article:

eBay Inc (NASDAQ:EBAY - 53.26) was heavily targeted by option players from both sides of the aisle on Wednesday, but calls easily emerged as the contracts of choice. By the numbers, around 26,000 calls changed hands on the day, versus approximately 15,000 puts. Short-term speculators honed in on EBAY's weekly series of options, scooping up the stock's 1/4 55-strike call. Nearly all of the 1,024 contracts traded here went off at the ask price, and open interest added exactly 1,024 positions overnight, pointing to the initiation of new bullish positions.

By buying these out-of-the-money calls to open, traders expect EBAY to finish north of $55 by Friday's close, at which point these options will expire. Specifically, the speculators will begin to profit with each step above breakeven at $55.06 (the strike plus the volume-weighted average price [VWAP] of $0.06) the stock takes over the next two sessions. This is a 3.4% premium to EBAY's current perch.

Widening the scope, it appears that put buying has been accelerating of late (yesterday's campaign for calls notwithstanding). At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.61 now ranks higher than 70% of other such readings taken in the past year. In other words, puts have been bought to open at a faster-than-usual pace (relative to calls) throughout the past two weeks.

Given the stock's roughly 77% year-over-year gain, the withstanding trend toward puts could simply represent shareholders protecting their portfolios against a pullback. However, with EBAY surging 5.1% yesterday following an optimistic brokerage note, it seems bullish speculators were encouraged to climb aboard the outperforming equity's bandwagon.

From a contrarian perspective, the stock could be poised for some additional analyst-related tailwinds in the near term. No fewer than eight out of 26 analysts still maintain a middling "hold" recommendation toward EBAY, and the consensus 12-month price target of $55.75 is just a stone's throw from the equity's current price. Simply put, the door is wide open for a round of upgrades and/or price-target hikes, should EBAY continue with its upward momentum.


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