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How To Trade The eBay Earnings Report Using Options

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eBay Inc (NASDAQ: EBAY) is due to report earnings for the December quarter on Feb. 3 after the bell. 

Here are the consensus Wall Street estimates for Wednesday:

  • Earnings Per Share: $0.83
  • Revenue: $2.7 billion

How EBAY Historically Moves Before And After Earnings

The table below shows how EBAY has historically moved before each of its last 12 earnings reports.

capture_12_0.png
Source: Marketchameleon.com

The obvious thing to point out is that the stock trades higher more often than not in the two-week and one-week periods before an earnings report. However, EBAY is, on average, flat in the three-day, two-day, and one-day periods prior to reporting earnings. 

The table below shows how EBAY has historically moved the day of its report.

  • “Earnings Move” refers to the amount the stock moved from its closing price before the report to its first closing price afterward
  • “Opening Gap” refers to the amount the stock moved from its closing price before the report to its first opening price afterward

unnamed_26.png
Source: Marketchameleon.com

As you can see, EBAY is just as likely to close higher after earnings as it is to close lower. And it’s slightly more likely to open lower than it is to open higher. In fact, it’s opened lower after each of its last five earnings reports. 

If You Are Bearish

For bearish EBAY traders, you may want to consider the bear call spread strategy. 

unnamed_27_0.png
Source: Marketchameleon.com

The bear call spread will profit if the stock drops before expiration. In the case of the trade outlined above, selling the $60 calls and buying the same amount of $65 calls, with both options set to expire Feb. 19 has an 83% chance of profitability based on historical patterns, according to Market Chameleon,

The payout diagram is as follows:

unnamed_28.png
Source: Marketchameleon.com

For this strategy, the maximum gain will occur as long as EBAY is at or below $60 at expiration. In this situation, the strategy would earn $83 ($0.83 x 100) per option sold. 

The max loss at expiration will occur when the stock price is at or above $65. The strategy will lose $4.17. 

If You Are Bullish

For bullish EBAY traders, you may want to consider the bull put spread strategy. 

unnamed_29.png
Source: Source: Marketchameleon.com

The bull put spread will profit if the stock rises into its expiration. In the trade above, buying the $47.50 puts and selling the $50.50 puts against it (with both options set to expire Feb. 5) has a 91% chance of profitability based on historical patterns, according to Market Chameleon,

The payout diagram is as follows:

unnamed_30.png
Source: Marketchameleon.com

For this strategy, the maximum gain will occur as long as EBAY is at or below $50.50 at expiration. In this situation, the strategy would earn $15 ($0.15 x 100) per option sold. 

The maximum loss will occur if the stock is at $47.50 or below at expiration, at which time the trade will lose $285 per option bought. 

 

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Posted-In: Earnings Long Ideas News Short Ideas Previews Options Markets Trading Ideas

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