Here is a quick preview of what I will be discussing tonight on Options Action on CNBC at 5pm est:
Event: Facebook (FB) will report its first quarterly earnings as a public company on Thursday July 26th. With no history to go by, the options market is pricing the implied move fairly high at about 11% (w/ the stock at $29, the July27th weekly straddle is offered at $3.20, that would mean if you bought that you would need a $3.20 move, or about 11% of the underlying to break-even on next Friday’s expiration).
Expectations: Earnings estimates have come done a tad in the last few weeks, but a penny on a .12 number isn’t particularly significant, especially given the lack of history as it relates to the company’s communication with analysts and investors.
Consensus calls for Q2 earnings of .12 and sales of about $1.47bn, and much like GOOG, the company is not expected to give specific forward guidance.
Sentiment: The street is fairly mixed on the stock with 19 buys, 16 Holds, 3 Sells, but with the stock’s decline and the borrow softening a bit in the months following the IPO, short interest has risen to almost 15% of the float.
Price Action: Since the stock’s rather epic decline from its opening print on its IPO day, stock has basically traded back and forth around $30, with the June low about $26 and the high about $34, well below the $38 ipo price. With less than 3 months of price action this doesn’t mean a whole heck of a lot, but with many shareholders long on the deal, the stock should see significant resistance from the mid 30s up to $38.
My View: Valuation and earnings have little interest to me at this point, they will be both inflated and volatile for years to come (think AMZN). In my opinion the main event on this call will be any color of how the company plans to manage their 3 month lockup expiration expected on Aug 16th of approximately 216 million shares, or about 50% of the shares sold in the IPO in May. If they let investors sell on the open market after the date things could be a little sloppy, which is why some companies, as LNKD did last year on their 6 month lockup expiration, choose to attempt to manage the process by giving sellers the right to sell in a secondary offering.
If LNKD’s lock up could serve as any help to understanding the potential pressure on FB shares into its own lockup, we can go back and look at the price action from November 3rd, 2011 when LNKD announced that they planned to sell more shares from existing shareholders and the company to the Nov 16th date when they actually priced the deal at $71. The stock traded down about 20%.
Regardless of FB’s results, I think the stock has a hard time getting back to the mid 30s in the very near future, for a number of reasons ranging from ridiculous valuation, to potentially weakening fundamentals and obviously the massive near term supply.
The Set Up: I want to make a near-term bearish bet, but I want to scale into the trade as I would get especially excited about the trade if the company makes no mention of managing the lock up and the stock for some reason trade higher post earnings . There is one risk to this scenario, if for some reason they are able to negotiate terms with shareholders to push out the lock-up, with short interest where it is we could definitively see a squeeze. So I wouldn’t be short the stock, but I like the idea of defining my risk making a near-term bearish bet.
I have a few trades that interest me, but the first one is what I will discuss tonight on the show and the one that I executed today.
My Trade: FB ($28.95) Buy July27th weekly/Aug 27 Put Spread for .40
- Buy 1 Aug 27 Put for 1.25
- Sell 1 July27th weekly 27 Put at .85
Break-Even on July27th weekly Expiration:
If stock above 29 next Friday at 4pm, the July 27 put expires worthless and I essentially own the Aug 27 Put for .40 What I would essentially like to happen would be the stock trade to my strike or a bit above, let it expire worthless and then look to sell a lower strike put in Aug against the Aug 27 Puts that I own.
- Max Risk is .40 premium I paid.
- If there is a dramtic move to the downside I will make the difference btwn the put that I am long and the one that I am short.
TRADE RATIONALE: IN this scenario I am trying to thread the needle a bit and make a bet that the implied move is too high for earnings, and collect some premium in the July weekly puts, while setting up for weakness heading into the company’s lockup expiration. I will look to spread the Aug 27 Puts after July expiration.
*Also Bid Ask in the spread is wide, and I bid inside screens and got done.
ANOTHER SET UP THAT LOOKS VERY INTERESTING TO ME, AND COULD BE OF INTEREST TO SOME MORE ADVANCED OPTIONS TRADERS IS SELLING THE JULY27TH WEEKLY 29 STRADDLE AT ~3.20 AND BUY AUG 27/23 PUT SPREAD FOR .90 (stock ref 29.00), I HAVE NOT DONE THIS TRADE BUT WILL CONSIDER NEXT WEEK PRIOR TO EARNINGS.
FB ($29.00) Sell July27th weekly 29 Straddle at 3.20
- Sell 1 July27th weekly 29 Put at 1.70
- Sell 1 July27th weekly 29 call at 1.60
Break-Even on July27th weekly Expiration:
- losses above 32.20 on the upside, or below 25.80
- profits of up to 3.20 if stock is at 29, and up to 3.20 anywhere btwn 32.20 and 25.80
2nd Leg Trade: FB ($29.05) Bought Aug 27/23 Put Spread for .90
- Bought 1 Aug 27 Put for 1.20
- Sold 1 Aug 23 Put at .30
Break-Even on Aug Expiration:
- Profits btwn 26.10 and 23, make up to 3.10, max gain of 3.10 at 23 or below.
- Losses of up to .90 btwn 26.10 and 27, and max loss of .90 above 27.
TRADE RATIONALE: If I were to sell the at the money straddle in July I am making a bet that the stock moves less than that and I will receive some premium for the sale, and use the proceeds to finance the purchase of the put spread in Aug Setting up for the lock-up expiration.