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Michael Haden's Insights

InvestorsObserver
Options Analyst Writer
Michael Haden
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April 27, 2015 - How to Find a Bargain on EBay

There are a number of strategies available to those of us who would like to make money with EBAY. This week, intrepid bargain shoppers made the most of Target’s new line of Lilly Pulitzer items. Bargain hunters swarmed stores to plunder the low-priced designer goods, then returned home to offer them up on EBAY. In some cases, flipping floral print dresses and the like yielded returns of ten times the original purchase price.  

For those of us, less fashion savvy, investors; there may be for a more traditional, though possibly less lucrative, strategy. If you are not inclined to speculate in the vagaries of the fashion world, EBAY stock itself may offer the investment opportunity you desire.

EBAY stock has a long history as a solid-performing investment, and EBAY continues to generate strong financial results. After the close April 22, EBAY posted first-quarter revenue and profits that beat analysts’ expectations. The company reported earnings per share of 77 cents on $4.45 billion in revenue, topping estimates of 70 cents and $4.42 billion.

In order to capitalize on EBAY stock’s consistent performance, we will look for a covered call that will allow us to reap the benefits of this strong track record while we take in additional premium gained from selling a call against the stock. The premium from our sold call will also provide us a cushion in the case that the stock should take a downward turn.

While we can expect the stock to continue to hold its own, we should be aware of the possibility that we may have to sell the shares at the strike price of our call. With that in mind, we're going to sell a call at a strike price that is a bit higher than the current price so that we can profit from both stock appreciation and from the premium we get from selling our call.

 

Charts courtesy of www.stockcharts.com

We will buy 100 shares of EBAY stock at $58.74. At open, we will sell a July ‘15 $60 call for $1.80 against those shares. We pay $5,874.00 for our 100 shares of JNJ while we receive $180.00 for the call option. This gives us a total investment of $5,694.00, or $56.94 per share. Our target return for this trade is 5.4% over 85 days which is 23.18% annualized. To cause a problem for us, EBAY stock will have to drop by 3.1%.  

Let’s look at the possible outcomes of our trade:

At expiration, EBAY may be above the strike price of $60.00 In this case, our call will be assigned and we will sell our shares at $60.00, which is more than we paid initially. Since we received that $1.80 per share credit up front, our actual cost basis is $56.94. This means that by selling at $60.00 we take in a profit of $3.06 per share.

If on the other hand… at expiration, the price of EBAY stock is below $60, our sold call will expire worthless and we will get to keep both the original credit we got for selling it and our underlying shares. At that point we will be able to sell another call if we like and continue to take in profits.

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