Name That Trade(s) $FB: Options Overlays For Existing Longs

by Dan January 28, 2015 12:11 pm • Commentary

Facebook (FB) reports their Q4 results after the close, the options market is implying a one day move of a little less than 7%. With the stock at 77, the Jan30th weekly expiration 77 straddle is offered at $5.40, if you bought that you would need a move above 82.40 or below 71.60 to make money, or about 7%.

Last night on CNBC’s Fast Money I highlighted a trade in FB that caught my eye as a trader bought 1500 of the Feb 69 puts paying .93 to open:



Here is the thing, this was not a particularly large trade but was worth noting as it was so far out of the money, and likely disaster protection for a long.   As a standalone those options have a very low probability of success. But in an environment where mega cap stocks like MSFT can decline 10% and AAPL can rally 8% post results, investors appear to be getting a tad spooked.

Interestingly though, 30 day at the money implied vol (blue line below) is at lower levels than where it has been prior to the last few reports, one reason for this though is the relatively low levels of realized volatility (how much the stock has been moving):

FB 1yr chart of 30 day at the money IV (blue) vs Realized vol (white) from Bloomberg
FB 1yr chart of 30 day at the money IV (blue) vs Realized vol (white) from Bloomberg

The base in the stock over the last six months is pretty amazing when you consider the fact the last six months has been six of the more volatile consecutive months in years:

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

As for the quarter, analysts expect 56% year over year earnings growth, and 57% sales growth, which is nothing short of eye popping for a company with $12 billion in sales. I would say going forward that the law of large numbers is likely to kick in as analysts expect 13% eps growth in 2015, and 37% sales growth. Still very impressive, but it’s important to remember that FB trades at 17x trailing 12 month SALES, meaning a $214 billion market cap. There is little room for error here.  

So from where I sit, a beat and meaningful raise and the stock breaks out above $80 easily.  But I suspect a runaway breakout is not in the cards in the current investment environment.  If expenses continue to rise (again), and the company guides lower I suspect we see a test of $70, and possibly a break, as FB has been a very crowded trade, one of the few large cap internet stocks to actually close up on the year in 2014.

Here are a couple overlay ideas for existing long, one for protection, the other for leverage in the event of a near term breakout:

For Existing Longs:


FB ($76.65) Buy March 85/70 Collar for 45 cents against 100 shares

-Sell to open 1 March 85 call at 1.20

-Buy to open 1 March 70 put for 1.65

Break-Evens on March Expiration:

Downside: Losses of stock between 76.65 and 70, protection below.

Upside: gains of the stock between 76.65 and 85, stock called away at 85, up 8.35 or 11%

Rationale:  One would do this trade overlay if they were more worried about extreme downside opposed to extreme upside for their holding. You would be giving up potential upside for protection down 10%



FB ($76.75) against 100 shares, Buy March 80/90 1×2 call spread for 1.70

-Buy to open 1 March 80 calls for 2.70

-Sell to open 2 March 90 calls at .50 each or 1.00 total

Break-Even on March Expiration:

Upside: gains of stock between current levels and 90, stock called away at 90, but have added 8.70 of leverage from the call spread, so effectively sold stock at 98.70 up 28%

Downside: below 80 lose 1.70 in premium for structure, and have gains or losses of the stock.

Rationale:  For those looking to add some fuel to the potential breakout fire and willing to risk some premium to do it.  One could tighten up the strikes and chose a structure where there is little to no premium outlay.