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Ride the Wild eBay!

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The crowning moment of a generally down trend for the stock market this week was the phenomenal 19.2% drop in eBay stock yesterday. Normally the performance of one stock in a large and balanced portfolio wouldn’t have gotten my attention, but because eBay has been doing so well I put a pretty large chunk of money into it and it split last year and made that investment even bigger, so that drop certainly got my attention.

The price had been going high enough that I was hoping for another split in the next quarter. A big, sudden drop was not at all what I expected. As a relatively conservative investor who manages his own portfolio I don’t deal much with the more speculative aspects of investing, including trading on the options market, which I was franly barely aware of. I mean, I know how options work and I know you can trade them, but it’s not something I’m likely to venture into. As it turns out this drop is eBay is all about the options. Apparently eBay had some outstanding options which were set to expire today, which were trading at about 55 cents and would allow you to buy eBay shares at $85, which was about $20 below what it was trading at first thing yesterday.

So it seems that a lot of people who had been betting on eBay as a growth stock decided to sell their eBay shares to raise money to buy these expiring options which they plan to use today to buy more eBay, speculating that the price will be above $85 today and they will make an instant profit. Of course, that rapid sell-off lowered the price to $83.33 by the end of the day Thursday and normal trading has only increased eBay by an average of 2% per day. If you add $83.33+$.55+$1.67 you get a price of $85.55, exactly what the speculators will have paid for their option shares once all is said and done. So if eBay does any better than that 2% increase today they make money. If it does worse they lose money, though if they hold the shares for more than a day it seems almost impossible for them not to profit substantially.

What they’re counting on is that with the lowered price people like me will scramble to buy more eBay shares at the lower price, so there will be a giant run on eBay today and the stock will shoot up more than 2% and they’ll make a bundle on their options. It’s not an unreasonable theory. Of course it’s also a classic example of manipulating the market for profit, which is very American but a little scary. What I find most remarkable is the fact that the price decline on Thursday stopped at exactly the $83.33 price which was the perfect break-even point. It’s a big market and there are a lot of eBay shares out there. How on earth did the final price end up at what can only be seen as the perfect number? Is it possible that someone or some group of traders own so much eBay that they could sell it in bundles during the course of the day to control where the price ended up? That’s a scary thought.

I’m not actually that worried about the situation. Even with its recent slightly disappointing earnings report, eBay will come back strong. If it doesn’t rally as hard as we would like today, it will rise steadily next week and eventually get back to where it was. Not as exciting for speculators, but fine for long term investors like me who are confident in eBay’s business model. The only question for me is whether I should free up some money and buy more eBay while it’s down or just hold on and see what happens. I’m not in the same advantageous position as those with options, but with the price where it is there’s the possibility for profit for anyone with money to invest.

Whatever I do, this situation with eBay is a fascinating example of how the market works and how there are potentially enormous amounts of money to be made if you have a lot of money to spend and take advantage of a sudden opportunity like this. My guess is that certain investors are going to have a few extra milion next week. The question is whether I’ll have a few extra thousand. Regardless of the outcome, it’s quite a dramatic process to observe. If I jump in and buy some more eBay I’ll post the results of my gamble here.


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About Dave Nalle

Dave Nalle is Executive Director of the Texas Liberty Foundation, Chairman of the Center for Foreign and Defense Policy, South Central Regional Director for the Republican Liberty Caucus and an advisory board member at the Coalition to Reduce Spending. He was Texas State Director for the Gary Johnson Presidential campaign, an adviser to the Ted Cruz senatorial campaign, Communications Director for the Travis County Republican Party and National Chairman of the Republican Liberty Caucus. He has also consulted on many political campaigns, specializing in messaging. Before focusing on political activism, he owned or was a partner in several businesses in the publishing industry and taught college-level history for 20 years.
  • bhw

    Very informative and interesting post on a lot of fronts.

    This sentence, in particular, caught my eye:

    Of course it’s also a classic example of manipulating the market for profit, which is very American but a little scary.

    I agree. What’s scary about it is that the big guys do it for their own profit, at the expense of the little guys. Only the big guys have the numbers/power to do it. I guess that’s very American….

  • Some related thoughts here

    I think there is about 30% more scope to fall before the stock becomes really tempting. The stock should probably settle around $90. Amazon too, went up to about $60 (when I sold), before settling in it’s current $40+ range.

  • I think eBay has much stronger overall prospects than Amazon. The whole product stocking issue with Amazon holds it back.

    I bought all of my eBay at less than $60, but I think that the only way it will ever get that low again is if there is another split and it rebounded from the last split very quickly.

    BTW, with an hour to go eBay is at $85.29 a share, so right now the speculators are losing money, but it was over $86 earlier in the day for a while and will likely come back up before the close today.

    Oh, and as for the big guys doing it when the little guys can’t, that doesn’t mean that the little guys can’t profit in the stock market. You don’t need to make a million dollars in a day to use the market to grow your wealth in a good, steady way. Return is always proportional to investment, but any return is better than leaving the money in your mattress or buying a boat.


  • Well, the speculators made some money today. Not a lot, but significant if you had a lot of money to put into it.

    The final price on eBay at the close was $86.05. That was a 50 cent profit per share for the options speculators. Though they’d have to buy an awful lot of options to actually make significant amounts of money in a single day. If there are real profits here they are in the long run.

    I actually made a little more than the options speculators because I bought early and got my paltry few shares at a total price of $85.24 each, so I made 76 cents a share. Woohoo! After commission I made almost 1% on the shares I bought.

    So, it wasn’t exactly a high-risk proposition for anyone, and it’s pretty likely that the upward trend will continue and by the end of next week the price will be back around $100 and people will have made some real money.

    The market as a whole has done remarkably poorly this week, with todays 78 point loss on the Dow capping the slide. The ebay rebound actually put me in the green, because my old shares also went up today, but overall the picture isn’t rosy. Let’s hope things get better next week.


  • Just a quick follow-up on the remarkable progress of eBay. After the run on options mentioned in this article the price of eBay stock hovered in the mid-80s for about two weeks and then on Thursday of last week eBay declared a 2 for 1 split.

    The stock is now in the process of rebounding from the split price, so those speculators who either bought options or bought eBay while the price was down because of the options rush are now poised to make really impressive amounts of money, something on the order of $20-$25 per share after the split over the next couple of months, barring any kind of disaster.


  • WILL


  • hellsjoker

    I kept wondering why are the people at Ebay continuing with the failed policies that are driving sellers away, why would a companies Executives drive the company life force into sucide?.

    Then it hit me, the only reason that they would do such a thing is that they want Ebay stock to crash, to devaluate, of course they will have sold off any of their interests in the company first.

    Some of the Executives at Ebay appear to have other interests, perhaps in an Ebay competitor, a company that they hold a great deal of interest in and that Ebay may stand in the way of so they plan to drive Ebay into ruination, and promote the competitor, once Ebay has been downsized or near ruination the other company takes over the online auction market and then buys what is left of Ebay stock for pennies on the dollar.