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Image via CrunchBaseThe shares of online auctioneer eBay Corp. (EBAY) have struggled during the past several weeks, with the stock pacing declines in the technology and retail sectors. In fact,
the security has plunged more than 17.5% since late April, closing Friday perched at $28.35 per share – just above its 52-week moving average. Despite the fact that EBAY has lost ground in six of the past seven weeks, one options trader placed a rather large bet that stability would soon enter the picture.According to data from Trade-Alert.com, a block of 30,000 EBAY July 27 puts traded at the bid price of $0.38, or $38 per contract, at 12:53 p.m. Eastern on the NASDAQ OMX PHLX (PHLX). Assuming the trader wasn’t legging into a broader spread position or tying the trade to an existing stock position, it would appear that we are looking at the initiation of a rather large put sell trade on EBAY.
Taking a closer look, the maximum profit on this position is limited to the initial credit of $38 per contract, or $1.14 million. The trader keeps this premium as long as EBAY holds above $27 per share through July options expiration.
However, there is considerable risk should EBAY shares continue to decline. In fact, the maximum potential loss on this trade arrives at $26.62, or $2,662 per contract, should the stock fall to zero.
At the close on Friday, the July 27 put was bid at $0.62, or $62 per contract, according to CBOE.com
Looking at EBAY’s technical charts, a short-term put sell position has some potential for profit. As a result of the stock’s recent downtrend, EBAY is verging on oversold territory. In fact, the equity’s 14-day relative-strength index (RSI) of 34.97 is hovering just above the 30 mark, hinting than an influx of buying pressure could be just around the corner.
What’s more, the stock is also perched on two key layers of technical support. The first is the stock’s aforementioned 52-week moving average – a trendline that has proven pivotal as support and resistance during the past several months. The second layer is the $27-$27.50 area, which has provided a floor for EBAY since late October 2010.
Weekly EBAY Chart with 52-Week Moving Average
In a stronger market environment, EBAY’s technical backdrop and near oversold condition could be enough to justify a bull call spread on the equity. However, with the current levels of uncertainty, and the prevailing downtrend in the overall market, a put sell position may be a more profitable play.
For those worried about the risk associated with selling an EBAY put, you could always hedge the position by purchasing a deeper out of the money put. By purchasing the July 26 put, which was asked at $0.42, and selling the July 27 put, at the close of trading on Friday, you could have entered a bullish put spread for a credit of $0.20, or $20 per pair of contracts. This strategy limits your profit to $0.20, but it also caps your losses at $0.80, which is considerably less than the maximum loss of $26.62 in the example above.
Profit/Loss Chart for EBAY July 26/27 Bull Put Spread
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