Call buyers spent the week positioning themselves for a strong earnings announcement by EBAY this coming Wednesday. During last Thursday's trading session over 32,000 call options were purchased, compared to just 4,000 puts. The July 29 calls saw over 7,000 new contracts purchased on Thursday and the July 30 calls on Friday have volume of over 5,100. This brings the open interest in the July 30 calls to over 13,000. There is also open interest of over 14,000 for the May ATM 27 call options and over 20,000 open contracts on the July 35 calls. Overall, it is safe to say that investors have taken a bullish stance on EBAY earnings, which will be released this coming Wednesday (April 21st) after the close.
While we expect EBAY numbers to be strong, we've seen over the last week that sometimes this still wasn't enough. Google (GOOG) released numbers that beat on revenue and profit and the stock still slipped $45 on Friday. This brings to question whether the Quarter 1 earnings season has already been priced into the markets and profit taking is taking place.
EBAY lost 2.4% on Friday as most equities were sold heavily. However, for the week the stock was still up. Implied volatility has risen to 35% versus historical volatility of 23%. So the street is expecting a move in the underlying stock on Wednesday. However, if earnings are in fact strong selling pressure could be minimal. On the upside, it may be time for the stock to consolidate. With that said, we are interested in a 22/23/29/30 May Iron Condor for a credit of $0.23. The risk on the trade is $0.77.
As we have seen so far this earnings season, strong numbers have not been bullish for stocks. This condor has plenty of room on both sides to work and could even recover from a drastic move after earnings. The break even levels at expiration are $22.77 on the downside and $29.33 on the upside. This means that to lose money on the trade at expiration moves of 12%+ both ways are required. We feel this offers an edge on the trade. Remember to factor commissions into this trade as multi-legged trades like iron condors typically have higher commission fees.