In last week’s edition of Trading Tools, American Electric Power Company, Inc. (AEP) was examined after the Zacks Unusually High Option Volume screener revealed an optimistic uprising in the options pits. Utilizing the same filter for today’s column, a different security piqued my curiosity: online auctioneer eBay Inc. (EBAY).
Before we begin, let’s explain the contrarian stance that makes Schaeffer’s so unique. When searching for a bullish pick, we like to see heavy skepticism toward an outperforming stock, as this leaves ample room for upgrades or other positive catalysts to fuel the stock higher. When searching for a bearish pick, on the other hand, contrarians are looking for significant bullish sentiment toward an underperforming stock, as we believe an excess of optimism is a sign that everyone has already bought into the stock and sideline money is virtually tapped out.
However, keep in mind that some optimism and pessimism is genuinely warranted and isn’t always a contrarian indicator – like an outperforming stock with many “buy” ratings or an underperforming stock with a plethora of “sell” ratings.
Option bettors were bidding for EBAY puts with a vengeance on Thursday, according to the Zacks screener. By the closing bell, the security saw nearly 10,300 puts change hands, more than doubling its average single-session volume of fewer than 5,000 contracts.
However, the preference for puts contradicts the recent trend on the International Securities Exchange (ISE). During the past couple of weeks, speculators on the ISE have bought to open almost 4x more EBAY calls than puts. What’s more, compared to similar readings taken during the past year, the Internet issue’s 10-day call/put volume ratio of 3.85 stands only six percentage points from an annual optimistic acme. In other words, option players on the exchange have rarely scooped up calls at a faster pace during the past 52 weeks.
So, why the sudden skeptical skew? After further research, it appears that not all of Thursday’s put-trading activity was of the bearish variety. At 11:37 a.m. Eastern time, 3 blocks totaling 2,500 EBAY Aug 16 puts changed hands at the bid price of $1.07, suggesting they were sold.
The aforementioned put writer could be positioning his or her portfolio ahead of eBay’s upcoming trip into the earnings confessional.
In order for the Aug 16 put seller to profit, shares of EBAY need to finish at or above the $16 level by expiration on Friday, Aug 21. Should the stock keep its head above the sold put strike by expiration, the investor could then pocket the net credit of $267,500 ($1.07 x 100 shares x 2,500 contracts) from selling the puts.
On the charts, it appears the 16-strike put writer’s position is arguably solid. Shares of EBAY have been range-bound lately, bouncing between the $16 and $18 levels since gapping higher in late April. Furthermore, any pullbacks could be contained by the security’s 10-month moving average; once a form of long-term resistance, this trendline has played the part of support during the past few months.
Also boding well for the put seller – from a contrarian perspective, at least – is the widespread skepticism surrounding the stock. According to Zacks, EBAY harbors only 5 “buy” or better ratings, compared to 17 “hold” or worse ratings.
A stronger-than-expected earnings report could be just the catalyst to spook the bears. A pleasant surprise could spark an exodus from the bearish bandwagon, placing additional buying pressure on the auctioneer.
