Event: Facebook (FB) reports Q3 results tonight after the close. The options market is implying about a 6% one day post earnings move tomorrow, which is shy of the average over the last 4 quarters of 7.2%, and the average since the company went public in 2012 of 7.7%. The stock has risen following each of the last 4 reports.
This past Friday we took a look at the upcoming print after the muted reaction to Google’s (GOOGL) strong Q3 results, and Amazon’s (AMZN) disappointing Q4 guidance (read here Facebook (FB) Pokes) and discussed on Friday’s Options Action on CNBC:
— Options Action (@OptionsAction) November 2, 2016
The main take-away from both the post and the hit is that I’d be surprised if there was some sort of unexpected fundamental hiccup in the last quarter that sets the stock up for a very sharp decline greater than the implied move of 6%. My thought is that GOOGL barely rallied on good results, as the stock seemed to be priced for that sort of outcome. While AMZN’s guidance was certainly a surprise, investors have become accustomed to give Jeff Bezos the benefit of the doubt, which is likely the reason the stock is only down about 5% since the print, below the implied move. Facebook is certainly priced for perfection on a valuation basis as well, much like AMZN, but not like GOOGL, so in my mind the risk remains to the downside. Which is why we detailed the following defined risk strategy for those who might consider stock replacement strategies, or a hedge for existing holders:
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 flip-side, 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.
Since Friday afternoon FB is down about $5, or about 4%, and a pull back in line with the implied move of ~6%, or close to $8 would bring the stock back to what appears to be technical support near $118, also its 200 day moving average:
The recent all time high came last week at $133.50, and a rally in line with the implied move would obviously place the stock at a new all time high in uncharted territory. Again its my sense that the upside might be limited though, as the stock has become a fairly crowded trade, up 22.5% on the year, dwarfing other mega-cap stocks ytd performance (AMZN up 14%, Apple up 6.5%, GOOGL up 2% & Microsoft up 8%). Last week we had some cautious comments about the breadth in the Nasdaq (Breadth Mints – QQQ).
As far as strategies into the print, not much has changed aside from the fact that the broad market feels a bit more spooked by the tightening of the polls in the presidential election. So for those inclined to trade FB long into the print, call butterflies still make sense, but we still prefer in the money call butterflies to offset the certain post earnings vol crush. For those who have healthy ytd gains, are mildly worried about too many investors heading for the door at the same time, but not too fired up to book the gain for tax purposes in 2016, collars like the one detailed Friday also make sense, but again adjusting the strikes to reflect the now lower stock.
My view into the print: If there is another Founder/CEO, besides Jeff Bezos of Amazon, of any other mega cap tech company that could care less about Wall Street analyst consensus, or investors short term desires, it is Mark Zuckerberg. I would not be surprised, with the stock a few percent from all time highs to see the company offer conservative Q4 guidance no matter what they print for Q3. Which reinforces my belief that traders new to the story consider defined risk strategies and those that are already long to consider protection.
For those looking to make a fresh outright bearish bet into the print, you night consider a put butterfly adjusting for the recent drop and change of tone in the market: In this instance it makes sense to define ones risk, look for near the money short dated participation:
FB ($127) Buy the November 4th weekly 126/118/110 Put Butterfly for $2
- Buy 1 Nov 4th weekly 126 put for 2.90
- Sell 2 Nov 4th weekly 118 puts at .50 each or 1.00 total
- Buy 1 Nov 4th weekly 110 put for 10 cents
Break-Even on Nov 4th weekly expiration:
Profits: up to 6 between 124 and 112 with max gain of 6 at 118
Losses: up to 2 between 110 & 112 and between 126 and 124 with max loss of 2 below 110 and above 126.
We’ll offer our usual disclaimer for long premium directional trades into events, you need to get a lot of things right to just break-even, first and foremost direction, timing and magnitude of the move.