Proactive Investment Strategies for eBay (EBAY): a Cash-Secured Put and an Iron Condor
eBay stock (NASDAQ: EBAY) experienced a recent downgrade to “hold” from “buy” by a pair of analysts with Kaufman Bros. who listed a number of concerns including lack of rapid growth in the company’s U.S. “gross merchandise volume,” a drop in traffic for the auction site during the first quarter, and possibility of negative repercussions due to global currency fluctuations.
The stock is currently trading at $26.40. EBAY shares have gained about 12% so far in 2010 but have been battling the $27 level overhead for the past few weeks.
Unfortunately, a stock investor can’t be terribly proactive should he want to follow this new “hold” rating. In fact, there isn’t much stock investors can do anytime when they have a neutral attitude. Similarly, if they are only slightly bullish, they can’t exactly buy shares in a half-hearted manner.
Options strategies, however, can be used in a number of scenarios to take a long, short, or neutral position in a security. Unlike stocks, which depend solely on the price action of the security itself, options trades have an element of time as well as the volatility factor to consider.
Below are just two potential options strategies for EBAY – these are not buy-sell-hold recommendations, just hypothetical examples of two trades – one bullish and one neutral, depending on whether you agree with Kaufman’s insight or expect continued strength in EBAY shares.
*Option prices given as of Thursday’s close
Bullish Option Strategy: Cash-Secured Put
EBAY fans might consider selling a short-term cash-secured put on the stock. The May 25-strike put is currently priced at 65 cents per contract. For every contract sold for 65 cents, the put seller would reserve $24.35 in cash in the event that EBAY breaches the 25 strike and the seller is forced to fulfill his obligation of buying the shares.
If EBAY is above $25 when the put expires in around 42 days, the put seller keeps the 65-cent credit as profit. If EBAY pulls back, the put seller will effectively buy EBAY shares at a discount price of $24.35 (the strike price minus the credit collected). At this point, should the trader keep the stock position, he is exposed to the standard risk of a long stock position – unlimited profit potential to the upside, and unlimited downside to zero in the shares. Traders should only enter a cash-secured put if they would not mind owning shares of the underlying.
Neutral Option Strategy: Iron Condor
If you think EBAY is unlikely to rally but is also unlikely to pull back dramatically, a short iron condor can be traded, which is a neutral strategy. An iron condor is a four-legged spread that is constructed by selling a bull put spread and a bear call spread simultaneously.
In this hypothetical example, a trader could sell both the July 24/23 put spread (selling the 24 put, buying the 23 put) and the July 28/29 call spread (selling the 28 call, buying the 29 call) and collect an overall net credit of 54 cents for the condor.
How Do You Feel About EBAY as an Investment?
When it comes to eBay, are you expecting further upside or do see a reversal in the cards? What strategy would you use to trade EBAY shares?
Compare OptionsHouse rates for stock options with other brokers, or if you are new to options and still trying to get your feet wet, practice trades without the risk in a virtual trading account.
Photo Credit: liewcf
Share and Enjoy:
Related posts:
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
