How to Play the EBAY Earnings Announcement

How to Play the EBAY Earnings Announcement

The following is a list of trades I made I made in my personal account this morning.

EBAY will disclose earnings after the close on Wednesday, January 16th.  As usual, Implied Volatility (IV) of the Jan-13 options (66) is greater than the Feb-13 options (35) due to the uncertainty of the earnings numbers.  This gives calendar spreads a considerable IV advantage.

According to WhisperNumbers.com, over the last 10 years, EBAY has exceeded the whisper numbers by more than a 2 – 1 margin.  This time around, both the analysts and the whisperers agree on a $.69 earnings number.

The trend for the company is surely positive, another indicator that things might be getting better:

ebay graph

It appears that at the last two earnings announcement dates the stock has gapped higher, nearly 10% both times.  The big danger with buying calendar spreads is that kind of a move.  For that reason, I plan to hedge my bet here and buy some uncovered out-of-the-money Feb-13 57.5 calls just in case history repeats itself.

Today, with EBAY trading at $53.00,  I bought 20 each Feb-13 – Jan-13 calendar spreads at the 50 and 52.5 strikes (using puts) and at the 55 strike using calls.  In addition, I stuck my head way out and bought 10 uncovered Feb-13 57.5 calls.

One of the persistent problems with placing calendar spreads in advance of earnings is that the IV of the long side falls after the announcement.  I suspect that this will not be much of a problem this time around.  I checked back a month ago and learned that IV for the Jan-13 options series with four weeks of remaining life was 33, which is only marginally lower than today’s Feb-13 level 35.  So the Feb-13 option prices shouldn’t plummet after the January options expire.

Here is the risk profile graph for my positions:

ebay risk profile graph

These are the positions I have:

ebay positions

  For those of you who prefer seeing these trades as I placed them, here they are:BTO (buy to open) 10 EBAY Feb-13 50 puts (EBAY130216P50)
STO (sell to open) 10 EBAY Jan-13 50 puts (EBAY130129P50) for a debit of $.50  (buying a calendar)

BTO 20 EBAY Feb-13 52.5 puts (EBAY130216P52.5)
STO 20 EBAY Jan-13 52.5 puts (EBAY130129P52.5) for a debit of $.56  (buying a calendar)

BTO 20 EBAY Feb-13 55 calls (EBAY130216C55)
STO 20 EBAY Jan-13 55 calls (EBAY130129C55) for a debit of $.54  (buying a calendar)

BTO 10 EBAY Feb-13 57.5 calls (EBAY130216C57.5) for $.58
These positions cost $3780 to place and commissions worked out to $162.50 at thinkorswim for a total investment of $3942.50.  I placed these trades when EBAY was trading right at $53.  According to the graph, EBAY can fall over $4.00 before I lose anything on the downside, and a profit will result no matter how much it moves higher.  I really like these possibilities.

With a month to go until expiration, an at-the-money EBAY option should be trading about $1.50, or almost three times as much as the average calendar spread here costs.  If the stock ends up Friday afternoon near any one of the strikes for these calendar spreads, one of the spreads should be a triple-bagger.

The graph shows that if EBAY closes at any point between $52 and $56 on Friday, these positions could make as much as 100% (including commissions, our best goal should be in the 70% to 80% range, however, especially if we close them all out before waiting until the last minute).

The big risk is on the downside.  If the stock falls more than $4, a loss would occur.  If you wanted to expand the downside break-even point you would buy additional spreads at the 50 strike.

I want to thank our old friend Fred for sending along this possible strategy.  If you do it and it doesn’t  work out, please blame Fred instead of me.  I won’t blame him no matter what happens – he has given me so many good ideas over the years that I will still be way ahead if this one does badly.

As usual, don’t invest any money that you can’t afford to lose.  Good luck to all of us.