Why one trader is bidding on eBay

Why one trader is bidding on eBay

EBay has rallied 26 percent in the past 12 months. According to one trader, bulls are now taking sizable positions in the stock, and there may be reason to join them based on the chart.

"We've seen institutional buyers of upside calls, call spreads and put sellers," said Andrew Keene of Keene On The Market. "I think eBay is headed a lot higher."

A call is a bullish bet giving purchasers the right to buy a stock at a set price within a given time frame. Likewise, selling a put is also a bullish wager that a stock price won't fall below the strike price of the put.

Since the start of 2013, eBay shares generally traded in a range between $50 and $60. But in mid-May, the stock broke above $60 to make an all-time high of $63.30. It opened Wednesday at $60.60.

A short-term chart of eBay also shows the stock has repeatedly tested a significant support level only to bounce higher afterward.

EBay headquarters in San Jose, Calif.
Getty Images

"Every time eBay has gotten to the 50-day moving average, it looks like it was going to break lower but then it attracts buyers," Keene said. "This has been numerous times over the last year—four times to be exact. There is a chance that eBay can dip a little bit lower toward this $58 level but I think it's going to head higher."

EBay's 50-day moving average is currently around $58.82.

Another technical pattern Keene is watching is what he perceives as a bull channel in its longer-term charts. "Every single time eBay finds sellers, buyers come into it," he said.

The two signals, combined with increased institutional options buying, are bullish, according to Keene.

One trade Keene notes was the purchase of about 60,000 of the October 70-strike call options for 80 cents each. Since each call contract controls 100 shares, the institution that entered this trade is betting around $4.8 million that eBay will trade above $70.80, or 17 percent higher, within the next four months.

Keene recommends joining in on the trade. "I think eBay, with the spinoff of PayPal—they always say two businesses are better than one—could potentially get up to $70 by October," he added.

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