Despite climbing 19% in the last three months, analysts expect eBay stock to remain mostly flat through the rest of 2017. That doesn't mean the profit opportunity is over, though. In fact, a new income opportunity is just beginning as the stock price starts to go flat.
Before we get into how to profit from flat stocks, here's a look at the eBay stock outlook...
EBay Inc. (Nasdaq: EBAY) stock was volatile in 2016, but that volatility has ended. EBAY dropped 10% in October after announcing poor fiscal year 2016 earnings. Since then, eBay stock is up 19%, more than recovering from the initial losses.
However, the large stock price gains are not expected to continue.
EBAY stock is currently trading at $33.70 a share. Analysts surveyed by Yahoo Finance have a one-year price target for the stock at $34.41. That's a gain of just 1.4% for the next 12 months.
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While the stock price gain may not be much to get excited about, the company has been posting consistent earnings per share (EPS) of about $0.45 for the past four quarters.
This type of stability lets you take advantage of a low-risk trade that gives you a monthly income...
Earning Monthly Income with eBay Stock
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The best way to profit from a flat stock, like eBay stock, is to sell covered calls.
Selling covered calls is a low-risk options trade that allows you to earn money with the initial trade instead investing money and waiting to profit when you sell much later.
Before making the options trade, you must first own 100 shares of the stock for every call option contract you want to sell. This is because each contract gives the buyer the right to buy 100 shares of the stock (underlying security).
Remember: When you buy a call option, you have the right, not the obligation, to buy the underlying shares at the strike price. If you decide to buy those shares, you exercise your options contract.
However, when you sell the call option, you are required to sell the shares of the underlying stock at the strike price if the contract is exercised. Owning the shares allows you to sell them if the option is exercised without having to buy them at market price first. This helps you limit or even eliminate potential losses from selling the stock at the strike price.
For example, let's assume you bought 100 shares of eBay stock when it was $30 a share. To make the math easy, we'll assume eBay is currently trading for $35 a share. If you sold now, you would make $500 ($5 per share x 100 shares).
Despite the fact that the stock price is expected to be flat this year, the company is still solid. You don't necessarily want to sell, but you wouldn't be upset if you got the right price for your shares.
In order to make some profits while you hold the stock, you sell a call option against those shares. You want to make sure the strike price (the price you have to sell eBay stock if the buyer exercises the option) is higher than the market price of the stock. This is called being out-of-the-money and reduces your risk of having to sell your shares.
Since we are pretending eBay shares are currently selling for $35, you would want to sell a call option that had a strike price of $40.
Ideally, we will look for a call contract that expires in about a month. This limits the risk of having the contract exercised and allows us to sell a new contract next month.
Let's assume that a call option for eBay stock with a strike price of $40 and an expiration date one month out (we'll call it March) is priced at $3.50. This means you will receive the premium of $350 ($3.50 x 100 shares) when you sell the call contract.
If the contract is exercised, you will make $1,350 ($1,000 from the sale of shares and $350 from the premium you get to keep) for a return of 4% in one month.
If the contract is not exercised, you keep the premium of $350 and your shares of eBay. You can sell another call option in March when the current one expires. The premium you received for the call option is a 1% return on the price you paid for the eBay stock. You can do this every month for an annual return of 12%.
Takeaway: Selling covered calls is a great way to earn a monthly income on a stock whose price is relatively stable. However, you should be OK parting with the underlying stock in case the option does get exercised.
Editor's Note: Options contracts are not something many investors are familiar with. To help you on the road to greater profits, we compiled a free "How to" guide to trading options.