Earnings season moves into full swing this week with a bevy of heavy hitters stepping up to the plate. Some of the marquee names include momentum darlings Chipotle Mexican Grill, Inc. (NYSE:CMG) and Under Armour Inc (NYSE:UA), tech titans Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY), and Dow components McDonald’s Corporation (NYSE:MCD) and The Coca-Cola Co (NYSE:KO).
Let’s zero in on eBay stock to see how things stack up heading into the main event.
On the technical front, eBay’s performance has been disappointing. Weighing on shares in recent weeks has been a massive failed breakout attempt over multi-year resistance.
As shown in the chart below, eBay staged a valiant breakout bid over the $58 resistance zone in late February. Bulls have been waiting for eons to see such a resolution of the lengthy trading range.
But, alas, it wasn’t meant to be — eBay stock has since slid right back into its range resulting in quite the ugly fakeout.
The breakout attempt was accompanied by a surge in eBay’s relative strength. The trendline break in the comparative relative strength study (lower panel) is on the verge of failing as well.
The uninspiring price action no doubt has eBay shareholders rooting for some type of upside earnings surprise to spark a renewed advance in their sagging shares.
A look into the options market reveals the typical pre-earnings dynamics. Increased demand for option contracts has driven implied volatility to levels comparable to prior earnings announcements. Currently eBay options implied volatility sits at the 71st percentile of its one-year range. Option premiums suggest participants are anticipating a 4% move or so out of eBay stock in reaction to earnings.
Selling eBay Earnings Volatility
With eBay stock price lacking much conviction one way or the other, traders may want to sidestep any kind of directional bet heading into earnings.
Instead, consider selling volatility ahead of the event with a May iron condor.
Sell the May $52/$49 bull put spread along with the May $59.50/$62.50 bear call spread for a total net credit of 51 cents. Consider the trade a bet that eBay will remain in a range between $52 and $59.50 in the coming weeks. The iron condor will benefit from the post-earnings volatility crush that will shrink option premiums.
The maximum reward is limited to the initial 51-cent credit and will be captured provided both vertical credit spreads expire out-of-the-money.
The maximum risk is limited to the distance between strikes minus the net credit, or $1.99, and will be lost if eBay stock rises above $62.50 or falls below $49.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
