Considering Our Options – $FB

by Enis March 25, 2014 1:53 pm • Commentary

Facebook has bounced so far today after an ugly breakdown to its 50 day moving average yesterday.  We received a question on our thoughts for our April 65/60/55 put butterfly (post included below) that Dan traded on March 17th.  This was Dan’s response:

FB closed below its 50 day moving average for the first time since late January, when the stock was considerably lower than where it is now.  We would probably look to exit the trade after the stock has one more large down day like yesterday.  But if the stock were to just grind lower in the coming weeks this would also be a very good scenario for the Butterfly.  We will be sure to update any more thoughts on the trade as we get them, but so far this was the premise of the trade that FB would underperform on a broad market sell off.

Looking at the technical situation in FB, the stock’s move to the 50 day ma occurred after the stock broke the $66.25 support level (red)

FB daily chart, 50 day ma in pink, 100 day ma in green, Courtesy of Bloomberg
FB daily chart, 50 day ma in pink, 100 day ma in green, Courtesy of Bloomberg

On this morning’s bounce, FB was unable to get back above $66.25, which we view as important short-term resistance.  The next move for FB above 66.25 or below yesterday’s low of 63.36 will likely resolve whether FB holds its 50 day ma over the next couple weeks or breaks lower towards the more important long-term support at $60.

For now, the Apr19th 65/60/55 put fly is worth about $1.03.  The structure currently has very slight positive decay, which means that the structure is not losing value with the passage of time at the moment.  We are going to hold on to the trade for now, though one more big red day, and we’ll likely take the trade off.


New Trade – $FB:  Eh, Zuck it.  March 17, 2014:

There are a lot of investors and analysts that I respect very much who are long or bullish on FB’s prospects. I do not share their enthusiasm at current levels.  We could talk about valuation, but at the moment that doesn’t matter, we could talk about issues of subscriber growth and engagement, but that doesn’t really matter either, the only thing that seems to matter is the company’s push into social messaging and their ability give their billion plus users the tools to share content and communicate with each other on their platform. If 2013 was the year that Facebook demonstrated to investors how they monetized the shift to mobile by jamming little ads into your news-feeds, 2014 will be highlighted by their ability to get their users to message each other with WhatsApp and see product placement on Instagram.

Here is one big issue though from where I am sitting, lots of the growth the company saw and the mix shift they saw from desktop to mobile had to happen, if it didn’t the company would not have been in the position to make the $19 billion WhatsApp deal.  Despite FB’s mobile growth, the overall growth of the company is decelerating from the triple digit pace for both earnings and sales to what will likely look more like low 40s % in 2014 and low 30s % in 2013.  Still amazing growth, but remember FB has now become one of the largest market cap companies in the world ($171 billion and the 5th largest weighted stock in the Nasdaq 100) and 35% earnings growth on a $1 eps number is hard to get to a reasonable PE for about a decade.

For those of you bubble watchers out there I can assure you when the market cools and we go into even a temporary bear market, FB’s acquisition of WhatsApp will clearly be pointed to as one of the tells that the gig was just about to be up.

If the bull market continues and investors remain unconcerned with valuation, then FB will continue to work, until they start to miss consensus estimates, that could easily be from much higher levels.   But if this week’s price action, where it appeared that many prior leaders and momentum stocks lost a bit of footing (all on the week: TSLA down 6.5%, GOOG down 3.25%, PCLN down 6.25%, NFLX down 5%, SCTY down 5.5%) , continues, FB could be come vulnerable for a pullback to its prior resistance.

While FB’s ytd performance has massively eclipsed all other large cap tech names (up almost 24%), this could be one of the reasons why investors look to sell first and ask questions later, harvest big gains and look to buy back on a pullback.

The one year chart below shows the target range for a pull back to the breakout following Q4 earnings:

FB 1 yr chart from Bloomberg
FB 1 yr chart from Bloomberg

With the markets getting a bit jittery both here and abroad, and with the SPX now back down on the year after a fairly volatile two and half months, investors may look to take some gains where they have them. I want to make a defined risk bearish bet that FB re-tests prior resistance over the next month.

Here is the trade:

TRADE: FB ($67.70) Bought April 65/60/55 Put Butterfly for .80

-Bought 1 April 65 put for 2.20

-Sold 2 April 60 puts at .85 each or 1.70 total

-Bought 1 April 55 Put for .30

Break-Even on April Expiration:

Profits: btwn 64.20 and 55.80  make up to 4.20 with max gain at 60

Losses: btwn 64.20 and 65 lose up to .80, btwn 55 and 55.80 lose up to .80 and above 65 and below 55 lose .80

Rationale:  This trade risks about 1% of the underlying stock price with a break-even down 5% and the ability to possibly make more than 4x what you risked if the stock is down about 11% in the next month. This trade may also make sense if you are long the stock to protect against a reasonable pullback.