Considering Our Options – $FB In The Money Call Butterfly

by Enis October 31, 2013 12:00 pm • Commentary

FB stock has been spastic ever since its earnings report yesterday afternoon.  We decided to put on an earnings trade in FB ahead of the event after considering the many push/pull fundamental and technical factors (see our preview) that had us leaning towards a lower-than-expected move on earnings.  This was our key rationale for our FB trade yesterday:

Even on a bad quarter or a bad reaction, we think it is quite unlikely that FB breaks the $45 level on the downside given the confluence of the prior longer-term resistance and the rising 50 day moving average.

On the upside, the reactions from the social media stocks today give us more confidence that even a strong report is unlikely to be met by a huge breakout above $55.  The momentum leaders of 2013 have not reacted in the typical gap-and-go fashion as they did earlier this year.  With that in mind, the risk/reward of playing for a stock remaining in the 46-54 range looks quite attractive.

We paid $1.10 for the Nov16th 45/50/55 call fly yesterday, and it is worth around $1.90 right now with the stock around $50.70.   The stock has greatly underperformed the implied move, and has stayed within the range we were targeting with this call fly, so we are seeing an immediate appreciation on the vol crush after earnings.

We had considered doing the weekly Nov1st expiry 45/50/55 call fly, which is worth around $3.00 with the stock around $50.70.  It would have been the bigger winner of the two structures.  But we were concerned about the potential for the stock settling near the edge of our targeted range, around 45-46 or 54-55.  In that case, our weekly would have only had one day to recuperate, while the Nov15th trade would have more time to move back towards $50.  Since the stock is close to $50 today, the weekly is the bigger winner (but it was a riskier trade at initiation).

We also considered different strikes, such as the 44/49/54 fly instead.  At the end of the day though, 50 was the mid point between the 6 week range between 45 and 55, so that made the most sense to us.

Interestingly, the after-hours action, and then the pre-market action this morning, was very volatile.  FB rose as high as $57.98 in the after-hours session, and fell as low as $46.38 in this morning’s pre-market session.  But in regular trading this morning, when the big boys participate, the stock has been in a range of $46.50 to $49.35, much tighter, and totally within our targeted range of 46-54.

Going forward, this trade still has plenty of time decay left in it, as it’s worth about $1.90 with the stock near $50.70, where the structure has $4.30 of intrinsic value.  Given that, our plan for now is to let the trade continue to decay.  Our main concern is a break of today’s low at $46.50 (which is also close to the rising 50 day ma), or a move above the $54 level on the upside.  For now though, we’re sitting tight.