Back in January, eBay was on the ropes. Its stock had lost more than one-third of its value in the preceding few months. Investors were set to write the company off as a relic from the 90s dotcom boom. That’s when two of its largest shareholders stepped up.
Elliot Management and Starboard Value put together a five-point plan to fix eBay. These two activist-led investment firms boiled it down for the company’s management: either fix yourself, or we will do it for you.
The group wanted eBay to increase shareholder value by unlocking its coffers. The two suggested ways were to increase the company’s share buyback program and issue its first-ever dividend.
Fearing a revolt in the form of a long, painful proxy battle, the company’s board approved both of these things. eBay more than doubled its repurchase plan and issued its first dividend two months later.
Shares have soared since then, up 45% year-to-date more than double the rest of the market at large. It’s clear these activist investors had it right. Just by unlocking a bit of eBay’s hoarded cash, others quickly jumped on board.
The rest of the demands back in their five-point plan, however, have been slower in coming. But it appears that the company hasn’t forgotten them either.
It called for a slimming down of businesses. The activists wanted eBay to sell off its Classifieds Group and its StubHub ticket platform. By refocusing on its core auction marketplace, the thinking goes, it can begin trading at a higher multiple, increasing its stock price.
Well, whether because of fear of being overthrown or because they liked the ideas, eBay’s board listened. It is now reported by The Times in the UK that eBay is actively looking to sell these two groups.
Apparently, they’ve already received interest from Vivid Seats LLC, KKR & Co. and Silver Lake for StubHub, which alone could be worth upwards of $3 billion… exactly what Elliot and Starboard wanted all along.
This is all great news for investors. eBay’s board followed directions from its shareholders to unlock heaps of value. There’s one problem, however… there’s no upside left.
That fantastic 45% rally so far this year has left the company at the peak of its price range. Investors got what they wanted even before all of those five-points were finished. But no one seems to have told investors yet.
This presents us with an opportunity. You see, eBay’s stock rally is set to enter a severe profit-taking period:
In fact, you can see that it appears to have already starting. After such a large and successful rally, its stock has entered this tight sideways pattern, oscillating around the $40 mark.
Now, none of this is to say that the company’s shares are about to tank. In fact, with its down-to-the-letter response to its activist investors, shareholders remain bullish. But its near-term rally is nonetheless dead.
So, shorting or opening up a long put trade in EBAY might not be profitable either. Fortunately, there’s a way to make money from this situation, even if shares don’t retreat from this peak…
A Strategy For a Hard Ceiling
A bear call spread is a type of options trade that involves selling one call option with a slightly out-of-the-money strike price and buying a second one with a higher strike. The income received from the first pays for the second. And whatever’s left over is your profit.
In other words, a bear call spread is a way to directly collect income as long as shares don’t rise. For eBay, it’s clear they’ve hit this hard ceiling already… even if investors aren’t selling off.
And that’s what makes this the way to play the situation. Shares don’t have to fall for this trade to remain profitable. They simply can’t rise.
You can see this reflected here:
Source: The Options Industry Council
For eBay, there’s no better way to play it. As long as shares remain below this hard ceiling, a bear call spread will pay out. Let’s look at a specific example to see how much…
A Specific Trade on EBAY
Right now, a trader could sell-to-open an October 18 $41 call on EBAY for $1.45 per share and buy an October 18 $42 call for $1.02 per share for a total credit of $0.43 per share. Since each contract is worth 100 shares of EBAY, that’s a net credit of $43 for the trader.
That $43 is his to keep as long as shares remain less than $41. Considering its testing and failing to break through this hard ceiling already this summer, that’s likely to remain the case for at least the next month.
Shares don’t have to fall from here for the trader to keep his $43, either. They can, of course. But they don’t have to. While most trades require some price movement, this one doesn’t. In exchange for how easy it is to maximum this profit, however, it does carry some risk.
If shares do somehow break through the $41 price point and then past the $42 mark, this trade would turn to a loss. To find out how much is specifically at risk, take the difference in strike prices ($42 – $41 = $1), and subtract the credit received ($1 – $0.43 = $0.57). On 100 shares, that’s $57 at risk here.
In other words, this trade would pay out a 75.4% return on the amount at risk over the next six weeks. That’s not too shabby for a trade that requires exactly zero price movement.
It’s impossible to say if and when these spinoffs and selloffs occur. No one knows how large these offers will be (though the $3 billion price tag for StubHub might be right). But in any case, all of this has already been priced into eBay’s stock.
There’s limited upside in the near term. While the downside isn’t large, it doesn’t have to be to cash in a 75%, six-week return with this strategy.