eBay Inc (EBAY): 2 Ways to Play Puts Ahead of Earnings

eBay Inc puts are being bought and sold to open ahead of tonight's quarterly report

by Karee Venema

Published on Oct 15, 2014 at 1:47 PM
Updated on Jun 24, 2020 at 10:16 AM

eBay Inc (NASDAQ:EBAY) option traders are loading up on puts ahead of the company's quarterly earnings report, due out after tonight's close. Puts are trading at four times the average intraday rate, and are outpacing calls by a more than 2-to-1 margin. Amid this accelerated activity, the equity's 30-day at-the-money implied volatility (IV) has shot 9.8% higher to 34% -- just 3 percentage points from a 52-week peak.

Drilling down, pre-earnings speculators are targeting the equity's October 48 put, but not all of the activity is of the traditional bearish variety. Of the 25,824 contracts traded here, it's been a pretty even split on both the bid and the ask sides, signaling a mix of seller- and buyer-driven activity -- a theory echoed by data from the International Securities Exchange (ISE). Meanwhile, IV is up 6.3 percentage points, and volume outstrips open interest, making it safe to assume new positions are being initiated.

By writing the puts, traders expect EBAY to remain north of $48 through this Friday's close, when front-month options expire. By purchasing the puts to open, speculators are betting on the stock to breach this level by week's end. Amid today's 2.7% decline which has EBAY lingering near $49.22, delta on the put has moved to negative 0.31 from negative 0.15 at last night's close, suggesting an increased probability the option will be in the money at expiration.

Historically speaking, EBAY's post-earnings price action tends to favor bears. Over the past eight quarters, specifically, the stock has averaged a loss of 1.5% in the session subsequent to reporting, which widens to 2.4% when going out one week. The options market, meanwhile, is expecting a roughly 4% post-earnings move, based on pricing structure of the near-the-money October 49.50 straddle.

Elsewhere on the fundamental front, Piper Jaffray continues to wax pessimistic on EBAY ahead of Apple Inc.'s (NASDAQ:AAPL) upcoming rollout of its Apple Pay feature. Earlier, an analyst at the brokerage firm said that with estimates of 30 million iPhone 6 and 6 Plus users, "investors' concern around PayPal will be a headwind to shares" of eBay Inc (NASDAQ:EBAY).


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