Blasts from the past for tech traders

Tech mainstays of year’s past were back in the spotlight yesterday.

Sure, companies like Apple (NASDAQ: AAPL), Facebook (NASDAQ: FB), and (NASDAQ: AMZN) have grabbed most of the attention recently. But Wednesday’s options activity followed a different course as traders looked for rallies in some names that haven’t played center stage in some time.

EBay (NASDAQ: EBAY) hit first, with 9,000 May 36 call contracts purchased for $0.83 to $0.86. Matching blocks of May 38s were sold for $0.34 to $0.36, translating into a net cost of about $0.50. Known as a vertical spread, here’s how the strategy works:

  • Owning calls conveys a right to buy shares at a specific price. In this case, it’s $36.
  • Selling calls creates an obligation to deliver stock if it climbs to a certain price. In this case it’s $38.
  • Investors have an opportunity to earn the difference between those two levels. In this case it’s $2. (Buy for $36, sell for $38.)
  • Based on the initial cost of $0.50, that’s a potential profit of 300 percent if EBAY closes at $38 or higher on expiration. 
  • The breakeven is $36.50, and the entire position will become worthless if the online auctioneer fails to move above $36.

EBAY rose 0.76 percent to $34.25 yesterday. It surged in late January after better-than-expected earnings had analysts flagging the stock as a turnaround story.1 It’s been nudging all-time highs since then, and now the next set of numbers is due in less than a week on April 19. Say the trader is looking for another good report and doesn’t want to miss a breakout. Owning shares into an event like that can be very painful if the stock craters on weak results. That’s when the vertical spread, with its clearly defined risk, can come in handy.

Yahoo (NASDAQ: YHOO) gave up the fight for significant relevance last year by selling its once-cutting edge assets to Verizon Communications (NYSE: VZ). The company will then rebrand as Altaba and focus on its Asian businesses Alibaba (NASDAQ: BABA) and Yahoo! Japan.2 The options traders looked toward that future event, buying 5,000 October 49 call contracts for $2.36 and selling 5,000 October 52.50s for $1.08. They also sold 2,000 October 45 put contracts for $2.27. That combined the vertical spread with short puts – what many would call a very aggressive upside bet, as it comes with the potential for painful losses below $49. YHOO rose 0.09 percent to $46.83.

While strolling down Memory Lane, traders even found time for BlackBerry (NASDAQ: BBRY). Options volume was more than 5 times the monthly average after the former handset maker won a legal case for $815 million.3 It came with the stock at its highest level in more than a year, and less than two weeks after surprisingly strong quarterly results. Like the case of EBAY, analysts are calling it a potential turnaround story.4

Traders tend to love tech because there are so many stories. And yesterday some returned to a few classics. 

1. Reuters: EBay holiday-quarter revenue up 3.1 percent, shares jump. 1/25/17. EBay Breaks Out As Earnings Spark Numerous Price-Target Hikes. 1/26/17.

2. Business Insider: After the $4.8 billion Verizon deal, the husk of Yahoo will rename itself 'Altaba'. 3/27/17.

3. RTTNews: BlackBerry Ltd. (BBRY) Has Broken Out To A New High After Arbitration Victory. 4/12/17.

4. Business Insider: RBC: BlackBerry's turnaround is complete. 4/4/17.