New Trade $FB: Book-Ending Facebook

by Dan July 31, 2013 12:52 pm • Commentary

Earlier this morning I discussed the massive volume that accompanied the 40% rally in the last week in FB (below), but suggested that the subsequent spike in Implied Volatility was likely to moderate in the weeks to come as the stock will likely look to consolidate its recent gains.   Based on this assumption, I am putting on a trade that would benefit from the stock becoming range bound, albeit a wide range with options volatility moderating between now and Sept expiration:

TRADE: FB ($36.72) Sold Sept 34/32 – 40/42 Iron Condor at .80

Sold Sept 34/32 Put spread at .45

-Sold 1 34 put at .90

-Bought 1 32 put for .45


Sold Sept 40/42 Call Spread at .35

-Sold 1 40 call at .85

-Bought 1 42 call for .50

Break-Even on Sept Expiration:

-Profits of .80 btwn 34 and 40, profits of up to .80 btwn 33.20 and 34 and btwn 40 and 40.80

-Losses of 1.20 below 32 and above 42 with losses of up to 1.20 btwn 33.20 and 32 and btwn 40.80 and 42

Risk Chart:

[caption id="attachment_28762" align="aligncenter" width="578"]Screen Shot 2013-07-31 at 10.33.20 AM from ThinkOrSwim[/caption]

Rationale: Facebook’s rally back to its IPO price this past week has been impressive, especially considering how the stock looked like ti was being left for dead. No that it’s touched its IPO price, we expect a lot of overhang in the stock, but at the same time, feel that there are buyers lurking below to catch the next move high some time in the future. We fell fairly safe in selling that range over the next month and a half. What’s nice about the trade is, with no (planned) events between now and Sept expiration the risk of a gap higher or lower through our strikes is unlikely. If one of the sides of our range is challenged it would more likely take place over days or weeks not overnight, and thus gives us time to adjust or close if we feel threatened. The 80 to 120 risk profile is also pretty good and attracted us to those strikes. Volatility should come in following this move which adds even more protection in case the stock moves towards one of the short strikes.



MorningWord 7/31/13: In the last week FB, up more than 40% since reporting better than expected Q2 earnings, has gained almost the entire value of YHOO.   I am still a bit floored by the price action not just because of the magnitude of the rally but the ferocity of it, the stock traded 366 million shares on Thursday following the beat, the largest single day since its IPO on May 18, 2012  when the stock traded 580 million shares and closed just above the $38 offering price, a level not to be seen again. Well, until this morning where it is trading in the pre-market.   Despite the expected down-tick in trading volume from Thursday, the stock has traded at a continued torrid pace, 136 mil, 125 mil and a spike yesterday to 174 mil shares.

The magnetism in the last week of the $38 IPO price is quite fascinating. The fact that a well covered and well owned stock with a $64 billion market cap last Wednesday could in less than 5 trading days have a market cap north of $91 billion without any meaningful corporate action is mind-boggling.  But the definition of well owned is obviously debatable, on Monday, Jon Najarian of OptionMonster tweeted the following stat:

Large cap tech has been a dicey proposition of late, and large institutional investors who have been underweight the stock now have a reason to buy it, at a time when some of their horses of 2013 are starting to falter (GOOG, MSFT & Semis).

So the gazillion dollar question at the moment is if the strength can continue?  For the time being I see no reason what soever to step in front of this thing, but I can’t for a second get my arms around the notion of buying the stock despite the fact there are probably a few more quarters of strong mobile growth.  But what we have here is a massive change in expectations, where heading into the Q2 print there were very low, but now becoming fairly high.  On the conference call FB CFO addressed this issue of expectations, but for the time being know one seems to care:

“ We expect newsfeed ads to remain the main driver of revenue growth in the second half of the year and we believe we have a great opportunity to continue to drive long-term growth by improving the quality and relevance of these ads. However remember that newsfeed ads really began to contribute to our revenue in the third and fourth quarters last year which will make for more difficult year-over-year comparisons in Q3 and Q4 relative to Q2.”

My sense here is that the stock will need to consolidate some gains prior to attempting a move to the all time highs made on IPO day of roughly $45, but given the recent spike in implied volatility, the best trade on the board at the moment, without picking a direction may be to play for vol to settle in.  Stay Tuned.