Update – Facebook (FB) Earnings Ideas

by riskreversal November 3, 2016 11:26 am • Trade Updates

Last Friday and then again yesterday we previewed Facebook’s (FB) Q3 results. We also detailed some trade ideas for those long the stock or those inclined to initiate a new long position into the print, but with defined risk. Why defined risk? Well peers mega-cap tech peers Amazon.com (AMZN) and Alphabet (GOOGL) failed to make progress after their divergent earnings reports last week, and it was our belief that FB was likely to see an a similar reaction (not much higher on positive news, somewhat lower on negative news but finding some support at fairly obvious technical levels, not a bloodbath).

Here was our rationale on Friday:

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 half a percent.

And here were Friday’s trade ideas with the stock $131.50:

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


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

We then updated those thoughts yesterday with the stock a few dollars lower into the event and highlighted a lower strike put fly for the new levels implied:

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

So with FB down ~5% (and finding support) on investor reaction to spending guidance for 2017, let’s check back in on these trade ideas:

First, the stock alternative is basically worthless (like .25) but the stock is down $10 from the level at which it was detailed. And that’s how it’s supposed to work, define risk, know what you can lose, and look to live another day. For those that use that trade to roll out of long shares, or for those that use that in lieu of buying stock, you are in a better spot here to try to bottom pick at some point than if you were long shares down $10 and contemplating puking them.

The next one to look at is the Nov 130/120/110 put fly. That cost $2 on Friday and with the stock now 121 it is worth about 5.25. But intrinsically, with 2 weeks to expiration is it worth $9. That means patience could pay off big here. If the stock were to settle in this range the trade will gain in PnL each day as the 120 puts decay. Using 125 on the upside and 115 on the downside as a stop makes sense. Anything in between there and this trade will be at least the same profit it is now with a higher likelihood of adding additional gains.

The last one is similar but with a closer expiration and it is the trade we detailed yesterday. The Nov4th 126/118/110 cost $2 yesterday when the stock was 127. Now with the stock 121 it is worth about 6.40. This did better because it expires tomorrow and the short 118 puts are only worth about .20. This is basically close to 100 deltas here so you have to think of it as short stock. What the stock does next is anyone’s guess, so I wouldn’t be greedy. Take the money and run.