Name That Trade – Liking $FB Range Trades?

by Enis December 10, 2012 1:04 pm • Commentary

Facebook has only been a public company for 6 months, but it’s had a roller coaster ride as a stock.  Look at the chart life-to-date:



The stock has had an obvious change in trend over the past month, after basing throughout the fall months.  I’ve circled the increased volume on rallies since its earnings bounce in late October, indicating that buyers were finally gaining control.

However, now that the stock is in the middle of its support (around $25) and resistance (around $33) areas, it’s hard to take a directional view on the stock.  With options though, the stock in the middle of its new range could offer a trade opportunity in itself.  

The current move up from below 20 to the high 20s seems close to done.  The stock has been flat for the month of December, with reduced intraday volatility as well, both points in favor of reduced volatility going forward.  My first inclination was to look for a range trade in Facebook that takes advantage of those support and resistance levels I highlighted to structure the trade.

For example, I could sell the Jan13 29 straddle, and buy the Jan13 25 / 33 strangle, and collect about $2.65, so risking $1.35 (if stock below 25 or above 33 by Jan13 expiry) to make $2.65 (if stock at $29 on expiry).  However, this trade just does not give me enough cushion given how much the stock has moved around in the past couple months.

To illustrate, here is a chart of 30 day implied volatility (red) vs. 30 day realized volatility (blue) in FB since inception:


[caption id="attachment_20370" align="alignnone" width="665" caption="courtesy of LiveVol Pro"][/caption]


As you can see, the realized volatility over the past 30 trading days in Facebook is much higher than the market’s expectation for volatility over the next 30 trading days.  In other words, other options traders expect Facebook stock to calm down and consolidate its 40% rise over the past month, a similar view to mine.  As a result, implied volatility is not that high despite the recent volatility.

Even if my overall thesis is correct, I am just not getting sufficiently compensated to put on a Facebook range trade here, so I’m not going to force it.  But if the stock does indeed sell off back near the $25 support level, then I’ll probably try a long delta entry of some sort, depending on how options are priced if/when that occurs.