Anatomy of a Trade: $FB Feb Put Butterfly

by Dan February 8, 2016 3:46 pm • Commentary

Prior to Facebook’s (FB) Q4 results on Jan 27th, we detailed a bearish put butterfly in February expiration that we considered as an outright bearish trade, or thought fairly suitable for near the money protection for longs.  Read the post from January 22nd here, but here was my rationale at the time:

In my mind FB is priced for perfection, maybe not on the surface relative to growth, but very likely relative to generally accepted accounting principles or GAAP. For instance, consensus estimates are calling for a 33% year over year EPS gain for FB, making the stock’s 34 P/E look pretty reasonable for a company expected to grow sales 38% in 2016. But peel back a layer of the onion and use GAAP earnings and that adjusted EPS of $2.87 looks more like $1.81 and the PE looks a bit more like 54x. And I am not sure there has ever been a near $300 billion market cap company that has traded 11.5x expected sales, 16x trailing. Convince yourself of that you want about their PEG ratio (PE to Growth) but if you are using adjusted you are fooling yourself (read Barron’s here on the topic from last June).

So what’s the trade? Is the stock near term oversold? Probably. Could it bounce above $100 on a beat and raise? You bet ya, probably as high as $105, but I suspect we will see some profit taking as that would put the stock unchanged on the year and I am not sure the market we are in is ready for the re-emergence of FANG.

Early next week, prior to FB’s earnings report I will consider the following trade as an outright bearish bet into the print. It really depends on where the stock is to choose my strikes, the higher the stock goes the more likely I am to execute the trade. But it’s really important to note that the reason for the complicated trade structure is because of the very high level of short dated options prices. We might decide to wait for the print and look to sell a bounce. But I would strongly consider this sort of trade structure as protection to long holders:

And here was the trade idea from Jan 22nd:

Trade: FB ($97.50) Buy Feb 95/85/75 Put Butterfly for $1.70

-Buy to open 1 Feb 95 puts for $3.40

-Sell to open 2 Feb 85 puts at $1.00 each or $2 total

-Buy to open 1 Feb 75 puts for 30 cents

Break-Even on Feb Expiration:

Profits: up to 8.30 between 93.30 and 76.70 with max gain of 8.30 at $85

Losses: up to 1.70 between 93.30 and 95 & between 76.70 and 75, max loss of 1.70 below 75 and above 95, or less than 2% of the stock price.

We did not trade this, and thankfully as we would have been very wrong initially, the company reported blowout results and the stock rallied to new all time highs the next day, closing up a whopping 15.5%.

Since then the stock has come in 16% from its post earnings highs, filling most of the earnings gap, and now with expiration 8 trading days away, this trade is back in play.  With the stock around $99, the put fly could be sold to close at $1.30 for a 40 cent loss.  If I had this trade on, had considered it a total loss just last week, I might considering the recent sell off a gift and close the trade and book a small loss.  But here is the thing, this is the exact sort of trade on might want if they thought the last few days selling were to continue.

As a rule as a trader when bailed out like this it usually make sense to cut the position meaningfully and look for a better entry after you have re-evaluated your thesis.


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