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Tuesday, February 27, 2024

Sales weakness prods Ebay bull into January 2010 ratio call spread

Today’s tickers: EBAY, SBUX, GE & AMAG

EBAY – Ebay Inc. – A large bullish call spread has been executed through option contracts in online retailer, Ebay, where according to customer traffic observers is facing a slowdown in sales. One of the measures implemented by newbie CEO, John Donahoe, is to is to push hard Ebay’s fixed-price offerings. However, according to some onlookers, that’s alienated some of the online auctioneer’s key customers. As one might expect, shares at Ebay are 5% lower today at $13.40, but one option investor is clearly using this as an opportunity to take a much longer-term view on the company’s prospects. The investor dabbling in the January 2010 call options paid 1.91 for 10,000 lots at the 17.5 strike and simultaneously sold 20,000 calls at the higher 22.5 strike for a 76 cent premium. The overall stance leaves the investor with a one-by-two ratio call spread at a net premium cost of 39 cents. That means that should the investor’s optimism pay off by expiration the trade will be worth the distance between the strikes of $5.00 per contract minus the cost. So at a share price of $22.50, the deal would be worth $4.61 to the investor. However, as with any call spread the risk is in that Ebay recovers its poise when investors start to discount serious recovery. In that case the investor breaks even at $27.11 and thereafter the net short call position creates penny-for-penny losses. But at present that would mean that Ebay would need to double in value.

SBUX – Starbucks Corp. – According to a Reuters News report, Columbian coffee growers have been discussing with investment bankers for the last year, the possibility and strategy of taking a stake in Starbucks, whose shares were unchanged at $9.39. Starbucks recently announced 600 store closures in the face of harsh economic times. Columbia is the world’s third largest coffee producer and wants its voice heard at the other end of the supply chain, which is what makes this story of interest. The flip-side of the coin is whether Starbucks would want to narrow its product offering in theory. Nevertheless, option traders put call options on the map in the world’s largest coffee store paying a 41 cents premium for 3,100 calls at the 10.0 strike and 5 cents for 1,300 calls at the 12.5 strike in the January contract. Bolder still, option buyers targeted the 13.0 strike in February where no open interest exists as they piled into 1,800 calls for 15 cents apiece. In the April contract investors lengthened bullish bets at the 10.0, 13 and 14 strikes by around the double the current bullish positions. Option implied volatility stood still at around 67%.

GE – General Electric – In the January contract an investor likely bailed out of a sizeable 100,000 call options, which formerly reserved the right to buy shares in the conglomerate at a fixed price of $40.00 per share. With around 201,000 established open interest at that strike price it’s hard to see precisely at what price the investors initially established the position, but suffice it so say, shares in GE are about as likely to recapture their former glory from the current $16.34 as George Bush is likely to get reelected by the time the options reach expiration. Elsewhere bearish option positions were in evidence with notable put volume trading to keen buyers at each of the February, March and Jun expirations. More noteworthy was the purchase of 7,700 puts for 24 cents each at the March 7.5 strike while another investor chose the June 5.0 strike to get long of 3,100 puts for a 27 cent premium.

AMAG – Amag Pharma. – Good two way positioning is in evidence at this pharmaceutical company where yesterday the FDA requested more information on its manufacturing and plant procedures of its ferumoxytol anemia drug. That drug is for chronic kidney disease. The company believes it’s in good shape to deliver and so is presumably positive on a nearer FDA approval process. With its share price giving up some of the gains this delivered yesterday, today shares are 2.3% lower at $33.25 while option traders have been active buying protection through put options at the January 25, 30 and 35 strikes while more optimism has been prevalent at the same expiration 40 and 45 calls where investors are doubling open interest. Today’s overall volume between bulls and bears of 21,200 lots represents about one quarter of the overall number of option positions on the company.

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