Trade Update $FB – Taking Off Call Butterfly for a Double

by Enis November 4, 2013 9:55 am • Commentary

FB has remained near our $50 mid-point level of our long call butterfly trade.  We discussed our decision in Thursday’s COO post, deciding to hold on to the trade.  But with the trade structure a double in just 3 trading days, we’ve now decided to take our profits.  The extreme intraday volatility since earnings coupled with the potential for more volatility in FB ahead of the Twitter IPO on Thursday makes us reluctant to hold this trade for another 2 weeks in the hope of collecting more premium.

This is a great example of the value of these in-the-money flies for vol crush situations.  We actually bought this fly when the stock was $49.10.  The stock is slightly further from our mid point today ($48.80), but the trade structure is a double.

Action:  Sold to Close FB ($48.80) Nov15th 45/50/55 Call Fly at $2.20 for a $1.10 gain


Original Post Oct 30th, 2013:  New Trade $FB – Sort by Most Recent Stories

Facebook’s performance over the last 4 months has been absolutely remarkable, adding more than $60 billion in market cap in less than half a year.  And really, most of the fundamental shift rested on a few extra hundred million in mobile revenues.  Mobile revenues sure do go a long way these days.

But recently, this morning’s reaction in the social media stocks is particularly notable as we look forward to FB earnings tonight.  That’s because the psychology surrounding these stocks matters much more than the fundamentals (again, a few hundred million in mobile revenues = $60 billion in market cap).  As I mentioned in this morning’s Macro Wrap, LNKD and YELP are both lower, even though their reports were not bad.  To me, that’s a sign that the investor appetite of buy at all costs in social media has waned this earnings season.  With that in mind, I really like the risk/reward for this trade idea:

TRADE: FB ($49.10) Bought Nov16th 45/50/55 Call Fly for $1.10

-Buy 1 Nov15th 45 Call for 5.52
-Sell 2 Nov15th 50 Calls at 2.86 each, for 5.72 total
-Buy 1 Nov 15th 55 Call for 1.30

Break-Even on Nov15th Expiration:

-Profits: Between 46.10 and 53.90, make up to 3.90, with max profit of 3.90 at 50

-Losses: Up to 1.10 between 45 and 46.10, and between 53.90 and 55, with max loss of 1.10 below 45 and above 55.

Trade Rationale: 

We outlined the importance of the $45 support level in the FB earnings preview, with the following chart:

Screen Shot 2013-10-30 at 11.17.11 AM

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.

Finally, we decided on Nov15th expiry as opposed to the weekly Nov1st expiry because we wanted to give ourselves time for a retracement in case FB moves right to the 45 or the 55 level after earnings.  Given our premise that FB is unlikely to see follow through in either direction, we prefer the 2 week risk rather than the 2 day risk to allow that to play out.