Trade Update $FB: Rolling Aug to Sept 13th, Still Long Oct

by Dan August 30, 2013 2:09 pm • Commentary

Selling the weekly 40’s worked well this week and made back the loss from gamma last week in the form of decay this week (about 30c.) With the long holiday weekend on the horizon and FB still near its highs we’re going to again roll out the short strike portion of this trade. This time going out two weeks to Sept 13th:

Action – Bought to close FB (41.28 ) Aug30 4oc for 1.30 –  Sold to open Sept13 40c at 1.98
New position – Long the Sept13 40 Oct 38c diagonal for 1.52 (currently worth ~2.35)

This structure again starts out as a small long delta trade (+5) but quickly turns negative delta as expiration approaches. The best scenario for us is weakness in the stock down to the 40 level in the next two weeks in order to collect the near term decay.




Pressing our luck on the 38 line cost us a little money today as the FB ripped higher on an upgrade note from JPM. Bad timing on the weekly expiration. We’re going to stay in the trade though as it’s still worked well overall and roll the weeklies out and up. The goal here remains to take advantage of FB’s move higher and yet have the optionality of that October call going forward. Ideally we’d like to collect as much premium from near term decay in the short term and be left with a nice position as we get closer to October expiration which catches the next earnings:

Action: FB ($40.40) bought to close Aug23rd 38 calls for 2.50  / sold to open the Aug30th 40 calls at 1.05
New Position: Long the Aug30th 40 / Oct 38 call calendar for 2.35 (currently worth 2.70)

Trade Rationale: We’d like to see FB take a breather in the next week, at which time it’d be possible to collect the premium on the weekly 40’s and be left with the Oct 38’s. If FB continues higher in a straight line the position is at risk of losing its profitability (at the time about 0.35) If it gets to that point we’ll likely just take the trade off.



Facebook has paused at its IPO price of 38 and it seems like it could continue to act as resistance for a bit longer. We’re going to try to squeeze as much out of that resistance level as possible and roll out the short portion of our call calendar:

ACTION: FB ($37.32) Rolled Aug17th 38 Call to the Aug 23rd 38 Call

-Bought to close 1 Aug17th 38 call for .01

-Sold to open 1 Aug23rd call at .41

New position: Aug23rd/Oct 38 Call calendar for .90 (currently worth ~1.45)






Original Post Aug 2nd, 2013:  New Trade $FB:  Monetizing Consolidation

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 stocks 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:

[caption id="attachment_28824" align="aligncenter" width="612"]Screen Shot 2013-08-02 at 9.57.33 AM from ThinkOrSwim[/caption]

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.