eBay on the rise after favorable court decision

Posted Dec 20th 2007 12:35PM by Brent Archer
Filed under: Good news, eBay (EBAY), Options, Technical Analysis

eBay Inc. (NASDAQ: EBAY) shares are trading higher this morning after the company announced yesterday afternoon that a Wisconsin court granted a motion for summary judgment of non-infringement on Netcraft Corp. patents to eBay and PayPal. Netcraft had filed a lawsuit against EBAY in May. While the ruling was welcomed by EBAY, it may not have much long-term impact on the stock, as EBAY likely would have arranged a licensing agreement for the patents in question had the ruling gone the other way. 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.

After hitting a one-year low of $28.60 in January, the stock hit a one-year high of $40.73 in October. EBAY opened this morning at $32.44. So far today the stock has hit a low of $32.16 and a high of $32.80. As of 11:05, EBAY is trading at $32.66, up 0.99 (3.1%). The chart for EBAY looks bearish and steady, while S&P gives the stock a very positive 5 STARS (out of 5) strong 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 an 11.1% return in just one month as long as EBAY is above $30 at January expiration. eBay would have to fall by more than 8% before we would start to lose money.

EBAY hasn't been below $30 since January and has shown support around $31 recently. This trade could be risky if the holiday retail season turns out to be very weak, but even if that happens, this position could be protected by strong support the stock has formed just above $30, where it bottomed out 3 times over the past year.

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 controls a bullish hedged position in EBAY.

Tags: EBAY, inthenews, options