Wednesday, October 19, 2016

EBAY Analysis

Update 11/19/2016: The short call vertical spread remaining from the EBAY iron condor expired without value, closing out the position entirely.

Altogether, shares fell by 12.1% over 34 days, or a -128% annual rate. The options position produced a 54.65 loss on debit for a -577% annual rate.

Update 11/14/2016: EBAY dropped sharply after earnings were announced, carrying its price below the profit zone of my iron condor position. 

As expiration approaches I've exited the short put vertical spread that makes up half of the position in order to avoid exercise. The short call spread will expire without value.

I'll calculate the the result after expiration.

The online auction house eBay Inc. (EBAY), headquartered in San Jose, California, publishes earnings on on Wednesday after the closing bell.

[EBAY in Wikipedia]


I shall use the NOV series of options, which trades for the last time 30 days hence, on Nov. 18.


Implied volatility stands at 41%, which is 2.9 times the VIX, a measure of volatility of the S&P 500 index. EBAY’s volatility stands in the 80th percentile of its annual range. The price used for analysis was $32.31.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; central tendency earns move

The Trade

The stock has been on the rise since June. Using Elliott wave analysis, it appears to be the beginning of a 3rd wave within a 3rd wave. Within that third wave, EBAY has been in a sideways correction since late July.

Invisible Influence: The Hidden Forces that Shape Behavior
by Jonah Berger

Zacks Investment Research ranks the stock as neutral with no sign of analyst adjustments for an earnings surprise.

Brokerages in aggregate give EBAY a negative 38% enthusiasm rating, with 29% of 24 analysts issuing strong buy recommendations.

The stock has closed higher the next trading day after three of the past four earnings announcements.

The chart: Neutral within an uptrend. Zacks: Neutral. Brokerages: Bearish. Post-earnings history: Bearish.

There's no way to identify a single direction out of the mish-mash. I shall use a direction-neutral strategy.

Iron condor, short the $35 calls and long the $36 calls,
short the $29 puts and long the $28 puts,
sold for a credit and expiring Nov. 19.
Probability of expiring out-of-the-money


The premium is $0.30, which is 30% of the width of the position’s wings. The risk/reward ratio is 2.2:1.

The zone of profit in the proposed trade covers a $6 move either way. The biggest immediate move after each of the past four earnings announcements was $3.37, and the average was $2.65. After eliminating the maximum and minimum post-earnings movements, the central tendency is $3.12.

Decision for My Account

I've entered a position on EBAY as described above. In order to get a fill, I lowered my ask by two cents to $0.30, raising the risk/reward ratio by 0.1 to 2.2:1.The stock at the time of entry was priced at $32.30.

-- Tim Bovee, Portland, Oregon, Oct. 19, 2016


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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