Name That Trade – $FB: Zucktoberfest

by CC October 28, 2014 3:11 pm • Commentary

We previewed the Facebook earnings earlier (copied below) and much like TWTR yesterday we want to follow up with some options structures we like depending on your current FB holding or directional bias:

Stock replacement/alternative for existing longs:   

FB ($80.00) Buy the Nov 80/90/100 call fly for 2.60

– Buy the Nov 80 call for 3.80

– Sell 2 Nov 90 calls at .63 (1.26 total)

– Buy 1 Nov 100 call for .06

Breakeven on Nov expiration – losses of up to 2.60 below 82.60 with total loss below $80. Gains of up to 7.40 above 82.60 and below 97.40 with max gain of 7.40 at $90.

Rationale: this is a great structure to get long exposure with a sweet spot to the upside at $90 without taking much downside risk into the event. A move straight to 100 would suck as you would get the direction right but not the magnitude (Pop Pop!) of the move correct and therefore the profits would diminish. But that’s an unlikely scenario.



Protection of Long Stock Position (100 shares)

Trade: Buy the FB ($80) Dec 70/90 Collar for even money

-Sell to Open 1 Dec 90 call at 1.20

-Buy to Open 1 Dec 70 put for 1.20

Break-Even on Dec Expiration:

Profits:  Gains of the stock btwn 80 and 90, or 12.5%, long stock called away at $90

Losses: between 80 and 70 up to 10 in losses of the stock, but protection below 70, last week’s low, down 12.5%

Rationale: We are believers in tactically hedging your best and most convicted ideas from time to time. FB’s performance in 2014 is impressive given the markets general disdain for high valuation stocks for the better part of the last ten months.  Collars can be used to avoid blow ups while allowing for upside participation and can always be taken off higher for slight losses. They offer investors a good bit of optionality into potentially volatile events or periods in the market.



EVENT: FB is scheduled to report their Q3 results after the close tonight.  The options market is implying a one day move in either direction for Wednesday of almost 8%, which is rich to its 4 quarter average of 5.5%, but shy of its lifetime average of about 10%.  The weekly at-the-money straddle is offered at about $6, implying a break-even on Friday’s close of $74 on the downside or $86 on the upside.

Sentiment: As one would expect with FB’s 45% year-to-date gains (equaling about $80 billion in market cap), Wall Street analyst sentiment seems to mirror that of investors with 44 Buys, 9 Holds and only 1 Sell on the stock.  The average 12 month price target is about $88, or 10% higher than current levels.  Short interest sits at only 2% of the float.

Technicals:  The 1 year chart is a work of art. It has had a fairly orderly ascent followed by periods of consolidation and then new highs.  The stock’s recent volatility, from $79 to $70 and back to $80, is slightly greater than the price action of the S&P 500, whcih makes sense given the nature of the beast.  To be fair, the price action in October was pretty orderly for a $200 billion market cap company that trades at 20x trailing sales.

On a near term basis, the stock could be mildly overbought heading into next week’s earnings.  $70 should serve as important support, the level it gapped above following Q2 earnings in July, as well as the low from mid-October:

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

Volatility Snapshot:  From an Implied Vol basis, options prices look fair to almost cheap when you consider that in the days following next week’s earnings, shares awarded to the owners of FB’s recently closed WhatsApp deal come unlocked and can be sold in the open market, per

As many as 178 million shares, or 8.8 percent of Facebook’s outstanding stock, may enter the market as a lockup on stock sold during the acquisition expires, according to Goldman Sachs Group Inc. analyst Heather Bellini. The shares could become available for trading in the two or three days after Facebook reports earnings on Oct. 28, Bellini said.

The one year chart of FB’s 30 day at the money IV below shows the recent decline in options prices since last week’s broad market lows, but also the fact that options prices are below the levels of each of the last 3 earnings reports over the course of 2014:

FB 1yr chart of 30 day at the money IV from Bloomberg


Granted, FB is a larger company today in market cap terms than ahead of prior reports (usually dampening volatility), but the stock’s realized volatility has actually been higher in the past month compared to the summer.  If FB implied volatility falls below 30 after earnings, long premium strategies will probably be a good risk/reward proposition for longer-term views.

Our View:  We discussed the major outperformance by FB in Friday’s Name That Trade post:

In the large cap internet category, aside from FB, it’s just Alibaba (BABA), Netflix (NFLX) and Yahoo (YHOO) with gains in 2014, with NFLX up just 3% following last week’s one day earnings implosion to the tune of 20% and YHOO has also just eeked up some ytd gains after rallying 10% since earnings Wednesday with ytd gains now of 7%.

I guess the point here is simple, sentiment has shifted away from the more speculative smaller stocks with less proven business models, but also from some prior leaders like AMZN and GOOGL in favor of the new kids on the block like BABA and FB who have captured investor fascination.

FB’s ability to continue to monetize its mobile business will be key for investor reaction. The main thesis for FB investors is the company’s integral positioning in the shift of advertising from offline to online, and particularly to mobile.  A continuation of momentum in that story will bolster the bull case, while a loss of momentum could cause some investor concerns.

Internet stocks have generally gotten hit on earnings so far in October (AMZN, NFLX, EBAY, TWTR, YELP, P, etc.), but FB stands out as the one name where sales and EPS growth have been continuing side by side.  With that in mind, we don’t have a strong view for earnings this quarter, but expect FB to receive more of the benefit of the doubt in the long run compared to other internet peers.