Name That Trade $FB: Try now we can only lose

by Dan July 29, 2015 12:18 pm • Commentary

Yesterday I did a quick preview of Facebook’s (FB) Q2 earnings results due tonight after the close (below), but I want to add a couple comments.

First things first, Facebook is a universally loved stock by Wall Street analysts with 46 Buy ratings, 6 Holds and only 1 Sell with an average 12 month price target of ~$102, or about 7% above where the stock is currently trading.  Positive sentiment is off the charts for a company that has quickly become the 13th largest stock in the S&P500, trading at 15x expected sales of $17 billion.  To put this in some context, FB’s $267 billion market cap narrowly edges out GE, a company that is expected to have $125 billion in sales, and 32% larger than Disney’s market cap, expected to have 3x the sales. Obviously FB is being valued (or overvalued depending on how you look at it) by its current growth rate and the runway for further monetizing their 1.4 billion user base.

In bull market terms, Facebook’s 35% expected revenue growth has resulted in investors tripping over each-other to buy the stock. In my opinion, shares of FB are priced for perfection, which could be dangerous for those investors new to the stock as the company in the past has shown little regard for Wall Street’s dislike of reckless spending. With the stock just $5 away from the nice round number of $100, I assume it wont take much to get there, especially when you consider the favorable trends in display ads that were evident in Google and Yahoo’s results reported in the last couple weeks.

All that said, the stock probably rallies tomorrow following the results barring what would be a shocking miss.

Here is how I would play with defined risk if I thought the stock could have an out-sized move like that of AMZN or GOOGL:

Trade: FB ($95.50) Buy July 31st 97.50 / 108 call spread for 2.50

-Buy 1 July 31st 97.50 call for 3.25

-Sell 1 July 31st 108 calls at .75

Break-Even on Friday’s Close:

Profits: up to 8 between 100 and 108 with max gain of 8 at 108 or higher, up 13%

Losses: up to 2.50 between 97.50 and 100 with max loss of 2.50 below 100

Rationale: This is a way to play for a move higher than the implied move, while risking 2.5% of the underlying stock price.  The trade targets a break-even of $100, a level the stock would at the very least get to if the stock had a reason to go higher.  Generally with options prices as elevated as they are in FB we would not be a fan of long premium directional plays, but much prefer this trade to long stock into the print.

For those that are less concerned about defining their risk they might consider a risk reversal like the one I detailed yesterday (below).

OR Protection of existing Long Stock – Put Spread Collar

If I were long stock and looking for protection I might consider selling an upside call and using the proceeds to buy a put spread.  For instance, with the stock at $95.50 you could sell the Aug 103 call at $2 and buy the Aug 90/80 put spread for $2.  This trade would offer upside participation until 103, up $7.5, and protection between now and Aug expiration between $90 and $80.


Estimates From Bloomberg:

2Q adj. EPS est. 47c (range 39c-54c)
2Q rev. est. $3.99b (range $3.66b-$4.20b)
2Q mobile ad rev. est. ~75% of total ad rev; ~73% last qtr
2Q monthly active users (MAUs) 1.475b
2Q daily active users (DAUs) 970.5m
NOTE: April 22, FB reported MAUs 1.44b as of March 31; mobile MAUs 1.25b; DAUs 936m on avg. for March

NOTE: In April conf. call, FB said sees 2015 GAAP expense growth 55%-65% y/y and adj. expense growth 50%-60% y/y




Name That Trade – A $FB Poke
2:29 pm EDT – July 28, 2015 By Dan 

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.

FB 1yr chart from Bloomberg

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:

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

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.