What Can an Upgrade in eBay (EBAY) Stock Mean To You?
Early Thursday, Credit Suisse upgraded its rating on eBay (NASDAQ: EBAY) to “outperform” (essentially a “buy” rating) from “neutral” (essentially a “hold”) and lifted its price target to $32 from $25, citing strength in auctioneer’s PayPal unit following the divestiture of Skype. Credit Suisse said new analysis reveals that EBAY could have more upside than they previously thought. EBAY shares closed at $26.94 on Wednesday and have gained more than 3% today to hit a new annual high.
Unlike brokerage firms, which are limited to three buckets – bullish (buy), neutral (hold), or bearish (sell) – options traders have dozens of strategies at their disposal depending on how much (or how little) they think a stock might move over a given time period.
Below are just two examples of ways stock traders might consider using options to trade eBay in lieu of (or in addition to) trading the stock. These are not buy-sell-hold recommendations, just a breakdown of potential strategies; one for EBAY bulls who side with Credit Suisse, and one for those investors who are in the bearish camp.
*Option prices given as of Thursday late morning
Bullish Option Strategy: Cash-Secured Short Put
Bulled up on EBAY? Consider the limited bullish strategy of a cash-secured put. Sell an out-of-the-money July 27 put can be sold for $1.61, and reserve $2,539 in cash for every contract sold (this is the difference between the strike price minus the premium collected). If EBAY stays above 27 through expiration, this premium is kept as a modest profit (return on risk is 6.3%).
If EBAY is trading below 27 when expiration rolls around, the put sellers will likely be assigned on the puts and have to buy EBAY shares to fulfill the obligation of the short put (hence the allocation of cash at the outset of the trade). But the put seller would be buying the shares at an effective price of $25.39, as the purchase price is offset by the premium collected for shorting the put. At this point, the trader assumes the risk and reward of a long stock position: unlimited upside and downside risk as low as the zero mark.
Bearish Option Strategy: Bear Call Spread
Traders who aren’t willing to buy into further upside in eBay could consider selling a bear call spread. Currently, the October 28/29 spread can be sold for about 40 cents (selling the 28-strike call and buying the further out-of-the-money 29-strike call). The maximum potential gain is this premium of 40 cents, while the maximum potential loss is 60 cents (the difference between the strikes minus the premium collected, for a return on risk of 67%). The spread sellers will collect the maximum profit if EBAY stays below 28 through October expiration and will collect at least some of the potential profit anywhere between $28.01 and the breakeven price of $28.40. Maximum loss occurs at the 29 strike and above.
Are you an EBAY bear or bull? Do you like these option strategies, or prefer something else entirely? Share your thoughts with the OptionsHouse community by commenting below.
If you are new to options and still trying to get your feet wet, it’s helpful to start by trying your trades in a virtual trading account.
Photo Credit: liewcf
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