eBay Options Traders Brace for Post-Earnings Volatility Crush

eBay will report earnings after the close on Wednesday, April 19

Apr 18, 2017 at 2:14 PM
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Earnings season is underway, and online retailer eBay is slated to unveil its first-quarter results after tomorrow night's close. Ahead of the event, EBAY stock is trading down 1.2% at $34.02, but found a foothold earlier atop its rising 20-day moving average -- currently located at $33.82. And while one EBAY options traders appears to be betting on a post-earnings ceiling for the stock through week's end, there could be an ulterior motive to the action happening at the April 34.50 call today.

Specifically, the April 34.50 call is EBAY's most active option so far, with 3,163 contracts traded. The bulk of this activity appears to be of the sell-to-open kind, meaning call writers expect EBAY to stay south of $34.50 through front-month options expiration at this Friday's close.

However, with implied volatility (IV) for EBAY's standard April options up more than 10 percentage points today, and IV at the April 34.50 call 12.2 percentage points higher, call sellers could be hoping for a post-earnings volatility crush. In this case, they expect the price of the option to fall dramatically after the uncertainty of earnings is removed, allowing them to buy the contracts back at a lower premium than the one they collected.

More broadly, options traders have taken the glass-half-full approach toward EBAY stock in the weeks leading up to earnings. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's top-heavy 10-day call/put volume ratio is 8.47, higher than 97% of all comparable readings taken in the past year. In other words, calls have been bought to open over puts at a near-annual-high clip.

This bullish outlook isn't surprising, either, given EBAY stock's technical tenacity. Year-to-date, the stock is up 14.5%, and hit a record high of $34.74 on April 5. Plus, eBay has enjoyed a positive earnings reaction in six of the past eight quarters, with the shares averaging a single-session post-earnings gain of nearly 7%. Another strong showing could encourage a well-deserved round of upgrades, too. Of the 21 analysts covering the shares, 13 maintain a "hold" or "sell" recommendation. Earlier, in fact, Macquarie raised its price target on EBAY stock to $39 from $34.

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