Considering Our Options – $FB: Monetizing IPO Price Consolidation

by CC August 13, 2013 2:45 pm • Commentary

When FB got back to its IPO price of $38, we suspected that it was a good spot to look for the stock to consolidate and try to take advantage of that with options. We placed 2 trades with that in mind and with the stock having done just that, I wanted to discuss how we’re looking at the trades now. The first trade (from July 31st) was betting that FB would establish a short term range once it got back to its IPO price and trying to make money off of that by selling upside and downside in the form of an Iron Condor:

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

We put this trade on about 70c lower in the stock with it’s centerpoint from a delta perspective about 37. It’s worth about 60c (20c better) now so is working well and is likely something we’ll keep on for the next few weeks unless one of the short strikes (34 or 40) feels threatened by a move up or down in the stock.

And, even more interesting this week is the second trade we did which was in the form of an August/October calendar. Here’s that trade from Aug 2nd:

TRADE:  FB ($38) Bought Aug / Oct 38 Call Spread for 1.30
  • Sold 1 Aug 38 call at 1.20
  • Bought 1 Oct 38 Call for 2.50

Because those Augs expire in a few days this is the trade we’ll be watching more closely into Friday’s expiration and one we’ll have to make a decision in on how to manage coming out of expiration. Right now the calendar is worth just under 1.60 and the August calls have a little over 20c in pure premium left to decay by Friday (as long as the stock is below 38 those will close worthless, if above 38 they will close at parity to the stock)

There are 3 choices that we could look for in the calendar.

First, would be to simply close the trade for a profit as close to Friday and as close to 38 as possible which would be maximizing the profit potential as a structure that was only for Aug expiration. However, we’re looking a little longer term and like the way the stock sets-up to stick around in the name.

Second, the most bullish of the bunch, would be to let August expire (or close the Aug 38’s for a dime or less) and then spread the Oct 38’s by selling something to their upside like the 40’s. This is a nice trade if you think FB’s action is a consolidation at 38 before a move higher to its IPO day highs (mid 40’s) That’s a plan we’ll seriously consider as it’s possible that we’d find ourselves able to do that roll and be left with a very cheap (or free depending where the stock is) 2 dollar wide call spread.

What we’re leaning towards though, is option 3:

Third, would be to continue to roll the calendar portion of the trade. This would be a bet that FB continues to consolidate around 38 for longer than a few weeks. It’s still a bullish sentiment, but much more neutral in the short term. This option could be done in a few different ways. The most obvious would be to sell a Sept 38 call, but we’re also thinking that with so many weeklies in the name, it might be fun to target them, and maybe not even the 38 line. We could do 39’s, 38.5s etc. This strategy is really isolating that near term decay and trying to capture as much of it during the consolidation phase before the stock starts to move again.

So we’ll be keeping an eye on FB into Friday and we’ll update on the site when we decide what the specific plan is for the structure.





A couple days ago I laid out the case for why FB shares should consolidate in the near term (below) and later detailed a trade that would take advantage of implied volatility compressing after the stock’s massive 40% move since reporting its 2Q earnings beat last week.  While Wall Street analysts and investors alike see continued success in mobile ads for FB, my sense is that in the near term the stock needs to consolidate a bit, and likely will do so at $38, which corresponds with the company’s IPO offering price that left hundreds of millions of shares underwater for the last 14 months.

As mentioned below, volume is abating from the extreme levels seen last week and with not identifiable catalysts for the next few weeks we think it makes sense to play for vol compression and consolidation in the stock. We also think that FB has a real chance to eventually break its IPO price to the upside following that consolidation. For those that have been looking to get into FB on a pullback for a break above its IPO price, a calendar structure that plays for a pause at this level but then leaves you with upside potential following the first expiration is one of the few palatable structures given the current elevated levels of implied volatility:

TRADE:  FB ($38) Bought Aug / Oct 38 Call Spread for 1.30

-Sold 1 Aug 38 call at 1.20

-Bought 1 Oct 38 Call for 2.50

Break-Even on Aug Expiration:

Profits are maximized at 38 on Aug expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.

Risk Chart: Here’s how the risk profile looks going into Aug Expiration:

Screen Shot 2013-08-02 at 9.57.33 AM
from ThinkOrSwim

As you can see the ideal spot for the stock is for it to continue to consolidate at 38. Ideally we want the stock to close near 38 on Aug expiration which would leave us long the Oct 38 calls, which that that point gives us lots of options, so to speak.

Trade Rationale:  We are already short a condor with defined risk that sets up for vol compression in a wide range through Sept expiration, this call calendar starts with a fairly similar premise in the very near term, but come Aug expiration in 2 weeks, we will look to possibly spread the Oct calls by selling a higher strike call to set up for more upside as the company approaches their Q3 report in late Oct.  The reason to once again spread the Oct calls is to offset what we expect to be continued vol compression, last weeks move was very unexpected and caught options market makers off guard.




MorningWord 7/31/13: You Know What’s Cool? 91 Billion Dollars. $FB

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.