With eBay Inc (NASDAQ:EBAY) trading at about $52 at the time of this writing, an in-the-money $45 strike call option currently has $7 in real or intrinsic value. The remainder of the premium is the time value of the option. And this call option currently has a delta of about 79.
Rule Two: Buy more time until expiration than you may need — at least three to six months — for the trade to develop.
Time is an investor’s greatest asset when you have completely limited the exposure risks. Traders often do not buy enough time for the trade to achieve profitable results. Nothing is more frustrating than being right about a move only after the option has expired.
With these rules in mind, I would recommend the eBay Inc (NASDAQ:EBAY) Jan 2014 45 Calls at $8.75 or less.
A close below $49 in eBay Inc (NASDAQ:EBAY) on a weekly basis or the loss of half of the option’s premium would trigger an exit. If you do not use a stop, the maximum loss is still limited to the $875 or less paid per option contract. The upside, on the other hand, is unlimited. And the January 2014 options give the bull trend almost six months to develop.
This trade breaks even at $53.75 ($45 strike plus $8.75 options premium). That is less than $2 above EBAY’s current price. If shares hit the breakout target of $66, then the call options would have $21 of intrinsic value and deliver a gain of more than 100%.
Recommended Trade Setup:
— Buy EBAY Jan 2014 45 Calls at $8.75 or less
— Set stop-loss at $4.37
— Set initial price target at $21 for a potential 140% gain in 7.5 months
The article This E-commerce Company Could More Than Double Your Money by 2014 originally appeared on ProfitableTrading.com and is written by Alan Knuckman.
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