Regular readers know that we are a bit skeptical of Facebook’s (FB) $265 billion market cap. We know that investors are in near universal agreement that they are continuing to dominate the existing social web as we know it, and well placed to participate in the mobile landscape dominated by short messages of all sorts of media. FB’s strength is their dominance, and that’s reflected time and time again with the inability by the likes of Google and Twitter and others to compete.
The risks to FB stock are what they’ve always been. Continued monetization of their massive user base. There could be some day in the not so distant future where Zuck can’t jam another ad on a 5 inch screen and the valuation comes crashing back towards reality. But we don’t know when that will happen so that’s a discussion for another day.
So in the mean time, the stock is probably going to $100. It got within 30 cents of the nice round number prior to earnings, and it seems like it will do so again. The trade that we are going to detail has little to do with the aforementioned high minded concepts and mostly to do with recent sentiment and techncials.
To refresh, after trading within a fairly well defined range of $75 to $85 from January to late June, the stock broke out in a big way, nearly touching $100 a month ago. Since Q2 earnings the stock has pulled back a tad as the breakout discounted which was by most accounts a good quarter with slightly higher expenses. Heading into the print sentiment was white hot, and now it has cooled a bit, possibly a rotation into Google as it shares just made new all time highs. $90 should be near term support and likely a decent long entry, but it has to hold there otherwise there is no support until $85:[caption id="attachment_56177" align="aligncenter" width="600"] FB 1yr chart from Bloomberg[/caption]
But, if the SPX is gonna to take another shot at the prior highs (even if it fails… again) I suspect FB will do its best to kiss $100 in the coming weeks. The chart shows a fairly even risk reward in my mind, up $5 or down $5, which lends itself to an options trade with defined risk to express what is now a slightly contrarian sentiment view. 30 day at the money implied vol is just below 27, if the stock were to continue to consolidate, or grind higher in the coming weeks options prices would likely move back to the low 20s:[caption id="attachment_56178" align="aligncenter" width="600"] FB 30 day at the money Implied vol from Bloomberg[/caption]
This is how we’d like to play this stock over the next month with defined risk and with a trade structure that’s somewhat defensive against a continued vol crush. However, we’re not pulling the trigger just yet:
Hypothetical trade: Buy FB ($94) Sept 92.50 / 100 / 105 Call Fly for 2.25
-Buy to open 1 Sept 92.50 call for 3.90
-Sell to open 2 Sept 100 calls at 1.00 each or 2.00 total
-Buy to open 1 Sept 105 call for .35
Break-Even on Sept Expiration:
Profits: up to 5.75 between 94.75 and 105, with max gain of 5.75 at 100. Profits trail off towards 105 but no losses occur above 105.
Losses: Below 94.75 lose up to 2.25. No losses above 105 due to the broken wing of the fly
Rationale: This broken wing fly targets 100 for maximum profits but also uses the 105 strike to make sure that there aren;t lossed an a massive breakout above 100. Therefore the main risk to this trade is Facebook continuing lower towards that 90 level. Because that’s a legitimate worry we’re going to wait on this trade a little bit and see if the stock can continue to hold the lows of the past few days before doing it ourselves.