Sell Covered Calls in Overbought EBAY Stock

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eBay Inc (NASDAQ:EBAY) has gotten a little too hot to trot lately and is likely due for some profit taking. Happy shareholders unwilling to face a pullback protection-less can use options to hedge their stock holdings.

eBay ebay stock paypalThe covered call in particular looks to be a nice fit in the coming weeks. Before delving into the details, let’s first take a closer look at EBAY stock’s recent ascension.

Shares of the popular California based e-commerce company have been on a veritable tear for the past month. EBAY’s stock price has risen almost 16% since early February, besting the rise in the broader market by a wide margin.

EBAY DAILY
Source: Stockcharts.com

Bears will point to the fact that EBAY stock has become overbought. Yesterday’s pop drove shares above the upper Bollinger band, signaling the current upswing may be on its last leg. To be fair, today’s down day has confirmed this forecast. While bears may have the upper hand in the short-run, bulls undoubtedly have the upper hand when we look at the bigger picture.

The recent surge in EBAY stock lifted shares out of a multi-year base. That’s a breakout of pretty epic proportions, and if it sticks, shouldn’t be underestimated.

EBAY WEEKLY
Source: Stockcharts.com

EBAY Covered Calls

EBAY stock owners looking to acquire some protection in the short run lest the pullback in the stock turns nasty should consider selling April covered calls. The implied volatility has ticked higher over the past week, increasing option premiums and making short option plays all the more compelling.

Selecting which call option to sell always involves a trade-off between the amount of downside protection acquired and the potential profit. The more protection received, the lower the profit potential and vice versa.

Traders more concerned with downside protection could sell the Apr $60 call for $1.70. This obligates you to sell EBAY stock at $60, but you receive $1.70 for your troubles. At the time of this writing EBAY was sitting at $59.85, which makes the maximum profit potential $1.85 for the trade, or a return on investment of 3% or so for the next month.

Traders willing to accept less protection in exchange for more profit potential over the next month could instead sell the Apr $62.50 call for 75 cents. This obligates you to sell the stock at $62.50, which affords the ability to extract additional gains in EBAY stock until it rises above $62.50.

At the time of this writing, Tyler Craig had no positions on any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/ebay-stock-covered-call/.

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