Trade eBay Inc (EBAY) Stock From the Auction Block

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For those who missed the rally to these levels, the dip in eBay Inc (NASDAQ:EBAY) presents another chance to get on board. The earnings report failed to excite Wall Street, so EBAY stock is down 2%, but off of Thursday’s post-market lows.

Trade eBay Inc (EBAY) Stock From the Auction Block

EBay earnings lacked the pizzazz that traders expect these days, but this doesn’t change the fact that the company is cheap and its stock ascending trend remains intact. So after a small adjustment period, I expect that this tizzy too shall pass.

So to cautiously catch this falling knife I use eBay options. there I can build a cushion to account for the fact that I will not likely pin point the absolute bottom in eBay stock. When stocks fall fast, the fears translate into bloated put premiums and therein lies my opportunity to sell them to create income.

But before I sell premium against those fears I have to find levels where prices are not likely to go. An important element of this strategy is that I am willing and able to own the eBay shares at lower levels.

Because while selling puts can be lucrative it comes with commitments. I must own the shares at the level I choose should price falls through it. In this case, the worst-case scenario would be that I would own eBay 11% lower than current price.

Before I put my money at risk I evaluate the fundamentals in of eBay. It sports a price-earnings under 6, which is very rare for a high-profile company. So I am confident that it would not be a massive mistake owning the shares lower.

I do recognize that its business model is under threat of competing services especially from local classifieds apps, but eBay still has a big enough head start to afford it a clear advantage for many more months.

EBAY Stock Options

The Trade: Sell EBAY Jan 2018 $32.50 put and collect $1 to open. This opens downside risk, but with 85% theoretical odds of success. If price stays above my strike then I retain the whole premium for maximum gains. Otherwise I suffer losses below $31.50.

Selling naked puts requires margin to secure the risk. This is not something that all traders are willing to do. For those, I can accomplish the same goal by selling a spread instead. There I buy equal number of puts, but lower. The worst-case scenario would then be equal to the width of the spread less what I collect to open it.

The Alternate Trade: Sell EBAY $32.50/$31 credit put spread where I have the same odds of success, but with much smaller dollars at risk. Yet the spread can still deliver a respectable 22% yield.

Because of the 11% buffer that I built, I made sure that either of these trades are catching this falling knife with safety gloves. Conversely, buying the shares here in the open market would be reaching for the blade with bare hands, which would likely be costly.

Investing is risky business, though, so never bet more than you are willing to lose.

Learn options as easy as 1-2-3 here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/trade-ebay-inc-ebay-stock-from-the-auction-block/.

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