What can a “hold” rating on eBay (EBAY) mean for option traders? - eBay (NASDAQ:EBAY)

Thursday morning, an analyst with MKM Partners lifted his rating on

eBay EBAY

to “neutral” from “sell.” (Neutral is essentially a “hold” rating). MKM maintains a 12-month price target of $20. The analyst noted that while his firm still has concerns about EBAY’s drooping market share in the e-commerce segment, they are “hard-pressed to identify a near-term negative catalyst that might drive the shares below our … fair value estimate.” In other words, EBAY may not move higher, but it might not move lower either, at least according to MKM Partners.

Looking at an EBAY chart, it’s clear that the stock has been relatively range-bound for several months. Since September 2009, the stock has made minimal movement below 21 or above 25, despite historically high volatility in the broader market and the tech sector.

There isn’t much a stock trader can act on when it comes to a “hold” or “neutral” rating. After all, it seems counterintuitive to buy a stock that isn’t going up or sell a stock that isn’t going lower. That could be where option strategies come in. Two hypothetical option strategies on eBay – one neutral, one bearish – are outlined below. Remember these are merely examples, not recommendations. Consider your own risk/reward parameters and personal trading goals before executing any new trades.

*Prices given as of Thursday afternoon. EBAY is trading at $21.94.

Neutral Option Strategy: Iron Condor

Unlike stock traders, who have limited choices when presented with a “hold” rating, option traders can consider selling iron condors, which typically benefit from a lack of movement in the underlying stock. An intermediate-term iron condor can be executed through the following legs:

• Short an October 21 put

• Buy an October 15 put

• Short an October 24 call

• Buy an October 30 call

This four-legged trade results in a net credit of $2.05 per condor. If EBAY continues to trade between 21 and 24 through October expiration on October 15, the investor keeps this credit as profit. The breakevens for this strategy are $18.95 to the downside and $26.05 to the upside, providing a bit more cushion and room for the trade to be profitable. The maximum loss of $3.95 (the difference between put or call strikes minus the credit) occurs at expiration if EBAY is above 30 or below 15.

Bearish Option Strategy: Long Put Plus Bear Call Spread

Investors who have a bearish view of eBay might consider a combined of long put and bear call spread. The January 19 put is currently offered at $1.50 and the January 24/30 bear call spread (selling the 24 strike, buying the 30 strike) can be sold for $1.50, making this essentially a costless trade (excluding commissions).

At expiration, the maximum loss is capped at $6.00 (the difference in the call strikes) if EBAY is trading above the $30 mark. Between the 19 and 24 strikes, there is no credit or debit to speak of (just as there wasn’t to enter the trade). Below 19, profits begin to accrue and are unlimited down to the zero mark. Theoretically speaking, gains are capped at $19 per three-legged spread.

Want to learn more about options trading in general or OptionsHouse specifically? Stop by our events page to review our schedule of free weekly webinars and sign up for one that interests you. Next week’s Tuesday strategy webinar is a deep-dive into long calls

Photo Credit: cytech

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