If the recent influx of put activity is any indication, bearish traders are flashing their teeth in eBay EBAY ahead of the online auctioneer's earnings report after today's close. BusinessWeek reported that the ratio of outstanding puts versus calls rose to 1.23 from 1 last week, hitting its highest point since July 2003.
Analysts, on the other hand, appear to be skewing bullishly. The consensus earnings estimate stands at 47 cents per share, marking a three-cent improvement over year-ago levels. What's more, according to Bloomberg, only one of the 35 analysts covering the shares rates it a “sell,” with 15 naming EBAY a “buy.”
Over the past year, EBAY shares are up 31% compared to 21% in the Nasdaq Composite. Over the past six months, these gains are at 47% vs. 27%, respectively. Since early November, however, the stock has been fighting to overcome the 30 level. The stock hasn't traded solidly above this level since early 2008, so it is possible the bearish investors out there are counting on this resistance to continue.
We saw evidence of this bearish activity on Tuesday as a block of 15,000 puts traded in the July 26 strike. These went off at the ask price of $1.32 per contract, suggesting they were on the buy side. While open interest was 35,000 heading into Tuesday's session, this morning the open interest has increased to 50,000 contracts, so it is likely that these puts traded to open. The cost for the entire block was nearly $2 million dollars in premium spend.
If the investors hold these puts through expiration, the maximum potential loss is the premium paid, should EBAY still be trading above 26. Below the breakeven price of $24.68, gains begin to accumulate until the zero mark. Long puts have unlimited reward potential only down to the zero mark (as stocks cannot trade lower than zero).
Delta on these puts is 27, meaning they should gain 27 cents for every dollar EBAY stock loses (and lose 27 cents for every dollar the stock gains). As time until expiration, volatility, and stock price change, delta will change as well, increasing if the stock price falls and decreasing as the share price rises.
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