New Trade $FB: “You have part of my attention – You have the minimum amount.”

by Dan April 4, 2013 11:56 am • Commentary

Earlier this morning we posted our thoughts on the Facebook Android operating system announcement. We think it’s a good opportunity for an entry on the short side with the thought that the stock could revisit its recent lows. We looked at a number of different structures and we liked several of them. One idea was to sell an in the money call spread like the Apr26 expiration 26/27.5 or the April regular 25/28. Both of these offer about 1 to 1 risk and act basically like shorting the stock with defined risk. We also looked at cheap long premium trades and executed this one:

Trade: FB ($26.65) Bought the April12th (Next Week) 26/25 Put Spread for .20

– Bought 1 of the FB April 12th 26 Puts for .27

– Sold 1 of the FB April 12th 25 Puts at .07

Breakevens on APril 12th (Next Week) Expiration:

-Profits btwn 25.80 and 25, make up to .80, max gain of .80 at 25 or below

-Losses of up to .20 btwn 25.80 and 26, max loss of .20 above 26

Rationale: This is a trade where we’re most likely playing for a double with defined risk and cheap premium. If the stock made a move back below 26 and towards its recent lows we would look to get out of the structure for a double. If we’re wrong we only risked a small speculative amount to be there.




Original Post April 4th, 2013 @ 10:27am:  $FB Phone Could Cause An Adverse Unintended Action By $AAPL

Today at 1pm eastern FB is going to announce the much talked about, but mildly anticipated FB phone.  Some of the early reviews of what is known looks like an interesting upgrade to what I believe to be an already annoying Android operating system for FB die-hards.  Bur really, how many FB die-hards are left out there??  I know, I know they have 1 BILLION registered users, I suspect only 700 million are actually active, and I know they have any amazing growth opportunity in emerging markets, but if they can’t figure ways to monetize users in the developed world they sure as heck won’t be able to do so in places like China and India.   I have said it before, and I will say it again, I think we will be speaking of FB in 5-7 years the way we speak about MySpace now.  I have increasingly read more and more about the younger folks and I regularly see youths using Twitter and WhatsApp more often than FB (which is confirmed when I ask them, yes creepy!).  

SO what we think we know about FB phone is that it will be a modified Android OS with some very tricked out FB integration.  My first takeaway is that this is a very dangerous strategy considering how large the iOS ecosystem is.  If FB so clearly draws a line btwn the FB mobile experience on their own device vs that of on an iPhone or iPad, they could run the risk of AAPL taking a very drastic step of buying Twitter and bringing a massive fight right to FB’s doorstep.

FB has rallied into today’s event, we think it is sale on the news as the product will likely be all hype, but let’s first look at the technical picture, and how it has guided our view on Facebook for most of the past 6 months.  Enis posted his CotD 3 weeks ago laying out the following:

Today, I continue to see FB stuck in a range between 25 and 30.  Unfortunately, implied volatility in FB has been low, so the risk/reward on range trades have not been great.  I haven’t pulled the trigger as a result.  But the lack of volume, tight range, and lack of headline interest indicates a stock likely in the doldrums for now.

What’s changed today?  Well FB actually breached the 25 level briefly in late March, but has since rallied back to its unchanged level for 2013, which is $26.61.  But this is an important area as fund managers who bought Facebook in November and December in anticipation of a strong year now see this level as their bogie to get out for flat.  More importantly, the 50 day ma is declining for the first time in 6 months, and there is a lot of overhead supply for FB stock:


[caption id="attachment_24373" align="alignnone" width="623"]Lifetime daily chart of FB, Courtesy of Bloomberg Lifetime daily chart of FB, Courtesy of Bloomberg[/caption]

The 27 to 29 area is designated by the red lines, where a lot of prior trading has occurred.  The pink line designates the 50 day ma, which is around 28 and declining.  FB stock is going to be hard pressed to make any further gains given all of that upside resistance.

We are looking at potential trades to fade the event announcement at 1pm, and will post before then if we decide to pull the trigger.