The equity markets are still hostage to headlines mostly about global tariff wars. President Donald Trump is trying to ameliorate the U.S. situation with its economic deals especially with China so he is upping the ante on imposing tariffs. The end result is to hammer out a deal, but until then, investors remain nervous and uncommitted.
Last night and after a positive day for stocks near all-time highs, the U.S. announced a fresh list of tariffs on $200 billion worth of imports from China. Traders hit the sell buttons overnight so investing in equities these days is affected in the short-term by these headlines.
However, there are few stocks that should be immune to this and eBay (NASDAQ:EBAY) is one of them. This is a successful global company that is not in the direct line of fire of these trade wars. So in theory, in these dips lie opportunities.
The short-term whipsaw of prices makes trading tricky because it makes entry timing crucial. To circumvent that, I use options where I can go long eBay, but with plenty of room for error.
It is important to note that EBAY has other special circumstances. Just before the stock market correction on Feb. 2, EBAY had just spiked to $47-per-share on an earnings report, but that marked a sharp top. Since then it has corrected over 20%, so technically it’s in bear market territory.
When a momentum stock falls this fast, it always seems like it’s headed into an abyss. Using options makes it easier to catch the falling knife while leaving a buffer between the current price and my level of risk.
While the headline threats still linger this year, I am more comfortable betting that the downside support will hold more so than to expect the upside potential to materialize. Meaning I sell downside risk against what others fear in eBay stock to create income out of thin air.
How to Trade eBay Stock Today
Today’s trade setup does not need a rally to profit. In fact, EBAY can fall another 15% and I would still retain maximum gains. Time does the heavy lifting as premiums decay in my favor. If a rally comes, then my profits will materialize faster.
Technically there is risk in the EBAY chart. If it loses the $35-per-share pivotal zone, it can lose another $2 from there. Worst case scenario in this trade setup is that I own eBay shares at a steep discount on the current price. This is an outcome with which I am comfortable as I’m confident that I can manage out of my position over the long-term for a profit.
Fundamentally, EBAY is not cheap from a price-to-earnings ratio, but it’s not bloated either. Most analysts on Wall Street agree as it’s now trading well below their lowest expectations.
The Trade: Sell the EBAY Oct $33 put. This is a bullish trade for which I collect 65 cents to open. I have a 80% certainty that I will retain maximum gains. But if the price falls below my strike, then I own EBAY shares. I would then need to manage off my breakeven point of $32.35.
Selling naked puts is daunting, so those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the EBAY Oct $33/$31 bull put spread, where I have the same odds of winning. Then the spread would yield 16% on risk.
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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.
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