Event: Facebook (FB) reports Q3 results on Wednesday November 2nd after the close. The options market is implying a little less than 6% one day move, which is equivalent to about $23 billion in market capitalization. The stock has risen the day after each of the last four quarterly reports (1.35%, 7.20%, 15.52% & 4.64%) with an average of about 7.7%. The average one day post earnings move since the company went public in mid 2012.
The price action today in Amazon.com (AMZN) and Alphabet (GOOGL), the day after each reported Q3 results is fairly interesting (read my thoughts from this morning here). But what sticks out to me is that the stock that was priced to perfection (AMZN), had massive year to date gains, had a decent quarter but guided down and the stock is down 5%. On the flip-side, GOOGL, which trades at a very reasonable multiple to its expected growth, was up in line with the ytd gains of the Nasdaq put up a strong Q3 and is up 50 bps (was up %.
Either way you look at it, both moves are fairly muted considering the divergence on the reports. And that may be instructive for how FB trades after its results next week.
Shares of FB are up 27% on the year, up nearly 50% from their 52 week lows made in January and up about 10% since mid July when it broke out to a new all time high. The stock has fairly obvious technical support at $120 down to its 200 day moving average around $117, with no overhead resistance above:
Short dated options prices have risen sharply into next week’s earnings, with 30 day at the money implied volatility (the price of options, blue below) at 30.7%, just below levels prior to their Q2 report in late July, more than double the level of realized volatility (how much the stock is moving, white below) which was very near a one year low after the stock’s slow creep higher over the last few months:
The takeaway here is pretty simple, options prices will come in hard after the results, especially if we get the sort of muted reaction to strong results like we are seeing in GOOGL today, but even if the stock were to decline less than what is implied as is the case today in AMZN.
So I want to lay out two defined risk trade ideas, one for those who want to play for a rise in the stock in line with the implied move, and the other for those who are long who might consider some protection down towards the $120 support level detailed above.
Bullish/ Stock Alternative:
FB ($131.50) Buy the November 130/140/150 call butterfly for $3
- Buy 1 Nov 130 call for $5.25
- Sell 2 Nov 140 calls at 1.20 (2.40 total)
- Buy 1 Nov 150 call for .15
Break-Even on Dec expiration:
Profits: up to 7 between 133 and 147 with max gain of 7 at 140
Losses: up to 3 between 130 & 133 and between 147 and 150 with max loss of 3 below 130 and above 150.
Rationale – On a move higher, profits won’t be entirely realized but November expiration is only a few weeks away so patience after a move higher will be rewarded as in the money premium decays. On the flipside, if the stock declines, the only thing that can be lost is $3, much much less than the implied move close to $7.
Bearish / Hedge:
FB ($131.50) Buy the November 130/120/110 Put Butterfly for $2
- Buy 1 Nov 130 put for 3.90
- Sell 2 Nov 120 puts at 1.05 each or 2.10 total
- Buy 1 Nov 110 put for .20
Break-Even on Nov expiration:
Profits: up to 8 between 128 and 112 with max gain of 8 at 120
Losses: up to 2 between 110 & 112 and between 128 and 130 with max loss of 2 below 110 and above 130.
Rationale: for a little more than 2% of the stock price this trade structure offers up to 6% of potential protection for two weeks after the earnings results.
WE WILL BE SURE TO FOLLOW UP WITH A MORE IN-DEPTH EARNINGS PREVIEW PRIOR TO THE RESULTS