Event: FB reports its Q2 earnings tomorrow after the close. The options market is implying about a 7.25% one day move, which is below both the 4 quarter average of 11.5% and the 8 quarter average of 10.5%
Sentiment: Wall Street analysts are very positive on FB, with 43 buys, 9 holds and no sells, quite a skew for a stock this widely followed (resembles GOOG among the large cap tech stocks). Analysts’ average 12 month price target is $77.70. The stock is up 27% year-to-date, and up over 150% over the past year. Short interest is around 2% of the float, close to where it has been over much 2014.
Options Open Interest: FB has been one of the most active options names in the market in 2014. In total open interest, calls outnumber puts by 1.6m vs. 1.15m. The average volume over the past month has been even more skewed towards calls, with a ratio of about 1.9 to 1.
For near-term maturities, the Aug16th 75 calls have over 60k of open interest, by far the most for a month or less. The Sept 70 calls also have over 60k of open interest. The bulk of the total open interest resides in Jan15, though most of the interest is in much lower strikes as the trades were put on a long time ago. The Jan15 55 calls have over 100k of open interest.
Price Action/Technicals: FB has rallied since mid-April in a grinding fashion, and is approaching its all-time high of $72.59 from March:[caption id="attachment_43245" align="alignnone" width="600"] SBUX daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]
Both the 50 day ma and the 200 day ma are rising, and the 50 day ma is now around $64.25. That’s the first support level to watch on the downside. On the upside, $72.59 is the obvious spot.
Volatility: Like most stocks in the market with the current backdrop, 30 day implied volatility remains at the low end of the 2 year range in FB:[caption id="attachment_43247" align="alignnone" width="600"] FB 30 day implied volatility, Courtesy of Bloomberg[/caption]
Traders have only priced in a 7.25% move for earnings, implying that even on a breakout, options traders don’t expect a huge gap and go move.
Our View: Dan laid out a trade structure in Friday’s Name That Trade post that we view as a much better risk/reward than long stock in FB ahead of the event. This was his conclusion in that post:
So this trade could be a very nice long stock alternative or for those looking to play for near term gains up 10% to 15%, but want to do so with defined risk. Or simply a trade for those looking to ride Facebook to new highs without risking a lot of downside if the entry is entirely wrong.
We have not put this trade on, but would prefer to do so closer to the company’s report to get a better sense for where the stock will be heading into the print. We will be sure to take a closer look prior to results.
We still have not pulled the trigger, as we are not sure whether we want long exposure in FB into the event, but will post if we trade it tomorrow.