eBay (NASDAQ:EBAY) stock has been on quite a run as of late. After hitting a low of $28.15 a little less than one year ago to stock has roared back, nearly doubling to $50.83 per share.
I wrote an article on eBay in June putting the fair value at about $43 per share, a bit more than the stock was trading for at the time. Since then the stock has rocketed past that value. If you're an eBay shareholder you may be thinking about selling your shares after the meteoric rise in share price. Instead of simply selling your shares now one way to not only choose your selling price but to also get paid for it is to sell LEAPS call options.
Selling Call Options
By selling a call option you sell someone the right, but not the obligation, to buy 100 shares of the underlying stock from you at the strike price on or before the expiration date. LEAPS, or long-term equity anticipation securities, are simply options with a long time until expiration, typically 2 years or more. Using LEAPS allows you to collect a larger premium since the expiration date is so far away. However, it obligates you to hold onto the stock until either the option is exercised or the option expires. You could, of course, always buy the option back at a later date.
Let's take a look at a few LEAPS call options available for eBay with an expiration date of January 2015, 820 days away.
When you sell one of these call options there are two possible outcomes:
- The market price never exceeds the strike price and the option expires worthless. You keep your shares.
- The market price rises above the strike price and the option is exercised. You are forced to sell your shares at the strike price.
This strategy is great for a shareholder who wants so sell out of the stock. It allows you to be paid for setting your own selling price. For example, let's say you're looking to sell your shares of eBay and want a price of at least $60 per share. If you sell the January 2015 $60 call option you receive a premium of $690, which is 13.57% of the current market price of 100 shares ($50.83). In other words, you immediately receive a 13.57% return on your shares. If the option is then exercised on expiration your shares will be called away at $60 per share, representing an 18.04% increase over the current share price. The total return, including both the premium and the stock appreciation, totals a 31.62% return over 820 days, or 14.07% annualized.
If you're looking to sell your shares of eBay then writing LEAPS call options allows you to set your desired selling price and receive a premium for doing so. With eBay stock having risen substantially over the past year the stock is far less attractive than it once was. Use this strategy wisely, though, because if you sell an option with a low strike price and the stock rockets above that value then you miss out on those gains.