Event: Facebook (FB) reports Q2 results, tomorrow after the close. The options market is implying about an 8.5% one day move on Thursday, or about $23 billion in market. The average move over the last 4 qtrs has been only 4%.
Options volume today is already at the 20 day average with two hours left in the day, with call volume about 2.5x that of puts.
There was a large bullish risk reversal that caught my eye shortly before 11am when the stock was $94.
A trader sold to open 12,000 July 31st weekly 87.50 puts at 1.52 and bought to open 12,000 of the July 31st weekly 97.50 / 107 call spreads for $2. This trade structure cost the buyer 48 cents, or $576,000 in premium.
The trader breaks even on Friday’s close at $98.98, offering profits of up to $8.02 up to $107, with max profit of $8.02 above $107. The trader suffers losses of 48 cents between 97.50 and 87.50, and would be put 1.2 million shares at 87.50 or lower and have additional losses one for one with the stock.
From a technical standpoint, the breakout in June to new all time highs after such a long consolidation was impressive. $85 should serve as massive support, while $90 should be intermediate support. On the upside, traders are clearly gunning for $100, and that should be a cake walk on the slightest bit of positive news given the price action we have seen of late in AMZN, GOOGL and NFLX.[caption id="attachment_55705" align="aligncenter" width="600"] FB 1yr chart from Bloomberg[/caption]
With the stock’s increase over the last few weeks, and the massive earnings moves by the internet stocks listed above, options market makers are taking few chances, with short dated options prices well above levels prior to the last two earnings reports, at a time when realized vol has picked up to the highest levels of 2015. In short the stock is moving a bit more than its has in the recent past, and that coupled with the volatility by its peers has caused a very elevated implied earnings move:[caption id="attachment_55706" align="aligncenter" width="600"] FB 1yr chart of 30 day at the money IV (blue) vs realized vol (white) from Bloomberg[/caption]
As for the bullish trade that we saw in the market today, it’s clear that this trader is cognizant of the high levels of options prices which is why they likely sold a lot more options than they bought, creating a fairly wide range over a very short period of time where losses are well defined, but also creating a situation where they have massive leverage to a move to new highs in the stock.
We will do a move detailed preview of the stock tomorrow, but thought worth highlighting the bullish trade today.