Facebook (FB) Earnings Trades Recap

by CC July 28, 2016 11:00 am • Trade Ideas

Yesterday afternoon I followed up on Dan’s thorough preview of Facebook earnings with some trades for those who were already long the stock, or wanted to be but wouldn’t buy a stock at all time highs with Beyonce’s money. We looked at a hedge, a “supercharged” over-write and an straight up alternative to be long without buying stock. Facebook is up about % this morning and I wanted to check in on how those trades worked out on the move.

The first is the hedge:

Hedge: against 100 shares of Facebook ($122)

Buy the July29th 120/110 put spread for 2.75

  • Buy 1 July29th 120 put for 3.20
  • Sell 1 July29th 110 put at .45

The best way to look at this is how much it cost vs how much the profits in the stock were realized. In other words if the stock goes up more than the hedge cost you still have more money in your Facebook investment than you did yesterday. That’s the case with this event as the stock is up, but it’s only up 4.50, versus the 2.75 spent on the hedge. That’s still profitable on a net basis but the hedge cost a good portion of those overnight gains. Whether that’s worth it depends on your profits to this point and whether the hedge is necessary to hold on to your stock without the worries of event declines. In other words, it can be tough to hold onto stock and let profits ride. Many times investors take gains too early on winners. Spending a few % of upside profits for the ability to ride an investment that’s working is often more profitable over the long term than trying to sell highs in order to “get back in lower.”

The next trade to look at is the 1×2 “supercharged” over-write. In this case the intention was to be able to capture a very small amount of yield (with the .20 credit) but more importantly be positioned to be able to add up to 3.20. Here was the trade idea:

Yield/Leverage vs 100 shares of Facebook ($122)

Buy the August 130/133 1×2 call spread for a .20 credit

  • Buy 1 Aug 130 call for 1.40
  • Sell 2 Aug 133 calls at .80

With the stock trading 127.50 this overlay is worth about .10 for a .30 profit mark to market. But this overlay is also perfectly positioned if the stock creeps higher back above 130 (where it was trading after hours) as that’s where the leverage kicks in. From an options standpoint the overlay is short deltas (about -5), even though it’s leverage if the stock goes higher. So in the very near term, as the stock goes higher it will lose value mark to market and as the stock goes lower The reason for that is that the Aug 133 calls (which is short x2 in this overlay) still have a lot of extrinsic value. But over the next few weeks into August expiration that changes. The 133 calls will begin to lose their extrinsic value at a faster rate than the 130 calls do. That’s accelerated if implied vol continues lower. So assuming no more overnight gaps higher, if FB goes higher it will likely be incrementally. And in that case the 1×2 call spread has the opportunity to add up to 3.20 in additional gains without much risk of being called away in the stock. And if the stock stalls or fails here the overlay simply collects the .20 credit. So not a lot of bad scenarios here.

The final trade idea was one for those looking to get long the stock but in a much smarter way than simply buying a stock at all time highs with all the risk that entails. Here was the trade idea:

In lieu of 100 shares of Facebook ($122)

Buy the August 110/125 – 135 call spread risk reversal for 1.50

  • Sell 1 August 110 put at 1.00
  • Buy 1 August 125 call for 3.00
  • Sell 1 August 135 call at 50 cents

With the stock 127.50 this trade is worth about 3.25. At some point soon you can start to think of this as long the 125 call and look at it from a risk reward scenario that way. In fact, closing the 110 puts now in the .05-.10 range pretty much turns it into that and clears up the margin associated with being short a put. As far as trade management at some pint you’ll want to close that put, then keep a stop on the downside in case the stock fails here. With the original price of the trade being 1.50, 126.50 seems like a level to keep an eye on as that’s the intrinsic break even on the trade. Anything above that level on August expiration and the trade is profitable, anything below that level and it risks losses. So trade accordingly knowing that break even level. (or if the plan was simply an earnings play, take the profits today).