eBay (EBAY) Q3 earnings preview and trade

Posted Oct 17th 2007 11:57AM by Brent Archer
Filed under: Earnings Reports, eBay (EBAY), Options, Technical Analysis

eBay Inc. (NASDAQ: EBAY) is scheduled to release its Q3 earnings after the closing bell today, and the company has guided for earnings of $0.31 to $0.33 per share, while analysts are expecting earnings on the high end of that guidance, at $0.33 per share. EBAY has beaten earnings expectations each of the past four quarters and has not had an earnings miss since Q4 2004. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on EBAY.

The stock has had a bumpy uptrend over the past ten months, hitting a one-year high of $40.73 earlier this month. EBAY opened this morning at $39.77. So far today the stock has hit a low of $39.26 and a high of $40.60. As of 10:40, EBAY is trading at $39.64, up 1.04 (2.7%). The chart for EBAY looks bullish and steady, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.

For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $30 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in just 3 months as long as EBAY is above $30 at January expiration. eBay would have to fall by more than 24% before we would start to lose money. Learn more about this type of trade here.

EBAY hasn't been below $30 since January and has shown support around $38.75 recently. This trade could be risky if the company's earnings this evening disappoint, but even if that happens, this position could be protected by strong support around $30, where the stock bounced twice in the past 8 months.

Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in EBAY.

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Tags: earnings, EBAY, Investors Observer, InvestorsObserver, options