New Trade $FB: Zuck in the Mud

by Dan May 31, 2013 2:32 pm • Commentary

Below is a summary of what I will be discussing tonight on Options Action on CNBC at 5:30pm:

From FB’s May highs on the 2nd to the lows this past Wednesday, the stock nearly entered official bear market mode, down almost 20%, before bouncing after receiving a couple ratings upgrades yesterday by Jeffries and BMO   (here).

FB 1 month daily chart from Bloomberg
FB 1 month daily chart from Bloomberg


On Tuesday, I took a look at the technical set up for FB in the MorningWord, and concluded that the stock was approaching a fairly dire support level, which it ended up breaking the next day.  Given yesterday’s bounce back above the all important $24 level, I would suggest that after being rejected this morning at its 200 day moving average,  the stock needs to stabilize at or above this level.

FB 1 yr chart from Bloomberg
FB 1 yr chart from Bloomberg


The next couple trading days will be very interesting for this stock to see if in fact it can stabilize above support or it just resumes the downtrend.  One of the big reasons in my mind for the stock’s under-performance this year vs the broad market and its peers has a lot to do with the sentiment towards the products and possibly a lack of understanding by investors as to how FB will increase user engagement with their services, whether they be on their computers, tablets or smartphone.  It is my opinion that to date as a public company, FB management has done a poor job of introducing products like Social Graph and most recently Home whereby they tried to take a page out of Steve Jobs playbook by announcing a media event and roll out the founder for the big splash………but in Facebook’s case, it almost every major product announcement had the least bit of “Wow Factor attached”.  Zuck risks being the “boy who cried wolf” with too many product misfires.

As a market participant, a business owner and an individual, I can tell you that FB serves very few purposes for my business or me individually, and I don’t see a huge future for the existing product offerings without some major tweaks that coincide with a quickly changing user demographic and online behavior.  That being said, watching Jim Cramer of CNBC’s Mad Money describe some of the issues facing the stock near term (below), got me thinking that with sentiment so poor, the next identifiable catalyst (Q2 earnings in late July) could set the stage for a rally on the slightest bit of good news.  The comment that stuck out to me was that in a market where insiders are selling,  “shorts have a free fire zone in the stock because there’s no buyback, insider selling, no dividend, no clarity.”   While FB the company is trying to find its way in a very competitive space, the stock is trading with one arm tied behind its back from an investor standpoint as there are few incremental buyers and it lacks some of the characteristics (buybacks, dividends etc) that seem to be a pillar of the long case for many large cap tech stocks.

Screen Shot 2013-05-31 at 1.27.28 PM

Cramer Quick Take: Long Look at Facebook

SO while I remain very mixed on the company and their products, if the stock could stabilize in this $24-$26 area over the next couple months and establish a new base, the stock could set up for a re-test of the $30 level following a better than expected Q2.

I want to create a structure that affords me the opportunity to hang around for such an event without having to take much delta or vol risk.

TRADE: FB ($24.50) Bought July / Aug 25 Call Spread for .58
  • Sell 1 July 25 Call at .97
  • Buy 1 Aug 25 Call for 1.55

Break-Even on July Expiration:

Barring major shifts in implied vol between the months or a massive move up or down this structure will not do a heck of a lot in the near-term. Where it does really well is around 25 in the stock as we get closer to July expiration. July will decay quickly at that point while August, which catches earnings should stay bid.  Max risk is .58

Payout Diagram:

The payout diagram illustrates that the ideal scenario for this trade is for FB to hang around the 25 level until July expiry.  Given the overhead supply from the last 6 months, we don’t plenty of sellers keeping FB from moving much higher in the near-term.  Last summer and fall, the 20 to 24 area contained a lot of trading, so those who missed the winter run higher are probably happy to buy the stock back down here.  That’s why we like targeting the 25 area for the calendar.

Screen Shot 2013-05-31 at 1.34.16 PM
from TradeMonster

Trade Rationale:  Rather than buying the stock in front of what could be a a volatile period as the stock looks to stabilize at support, or getting long outright premium on a directional basis, the calendar spread which has little delta exposure offers me the opportunity to spread the August calls after July expiration to further reduce my break-even into what may be a very important Q2 report.