In this uber-bullish equity market, almost every dip has been a buy opportunity. eBay Inc (NASDAQ:EBAY) stock is down on its luck, down -3% in a month. Today I want cautiously catch this falling knife using options.
It is difficult to compare the EBAY business model, but I liken it to Amazon.com Inc. (NASDAQ:AMZN) since they both are e-marketplaces. So for the past year, and even after this EBAY dip, both stocks are strong with similar stock rallies.
It is easy to get jaded with expectations, since this stocks market has been so one-sided for the bulls. Small dips seem like giant chasms. So it is important to not over-commit bullish risk on small dips.
Expectations for eBay stock are somewhat bifurcated, with analyst opinions on both sides of the fence. However they all agree that there is more upside potential for the stock than downside. It is now trading near the low end of all analyst price range.
If it lives up to the expert target, then it would double.
Nevertheless, I am not chasing upside potential today. I will instead place a bullish bet that will profit if the rally materializes but with plenty of room for error. This is important since the recent price action in EBAY does not inspire confidence.
Click to Enlarge The stock is setting lower lows and is now approaching a must-bounce level. Otherwise it could have a measured move lower that could test $36 per share. Even then it would still be trading inside the 12 months ascending channel.
Should that happen, then the $35/$34 zone becomes the next pivot point. This was the breakout line from this past July. Past resistance usually becomes forward support so bulls will try hard to make it so. My trade setups will leave enough room to account for all these scenarios. I leave little to chance.
Fundamentally, EBAY is cheap, with a single digit price-to-earnings ratio. The nature of its business makes it hard to compare its financial metrics to other stocks. But I do know that at three times book, it would not be a major mistake to own shares. This is important in my style of trading, since I do commit to buying shares if my thesis is wrong.
I do recognize that the EBAY business model is under threat of competing services especially from local classifieds apps, but it still has the reach advantage to afford it a clear leg-up for many more months.
EBAY Stock Trade Idea
The Trade: Sell EBAY Apr 2018 $32 naked put. This is a bullish trade for which I collect 70 cents per contract to open. I have an 85% theoretical chance that the price will stay above my strike. Otherwise, I own the shares and can suffer losses below $31.30.
Selling naked puts carries big risk. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the EBAY Apr 2018 $32/$30 credit put spread which can deliver 15% yield. Both trades have the same odds of winning.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Learn how to generate income from options 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 as @racernic on twitter and stocktwits.
