Yesterday we detailed a couple trades in the market that appeared to be long stock alternatives where traders better defined risk by selling out of the money puts, and using the proceeds to help finance buying out of the money calls spreads (here and here). We also detailed a similar strategy in Apple (AAPL) for those who fear the stock’s recent run might be tempered by weak fq2 guidance when the company reports fq1 results the week of Jan 23rd (read here).
One of the surprising outcomes in the post election rally of the last month and a half of 2016 was how prior mega-cap tech stock leaders like Alphabet (GOOGL), Amazon (AMZN) and Facebook (FB) largely sat out the euphoria, closing the year down from their recent 52 week and all time highs, 4%, 11% and 14% respectively.
Shares of all three are out-performing the Nasdaq’s YTD 1.7% gains, with FB up nearly 4% so far on the year. The technical set up in FB, on a near term basis could be at an inflection point, bumping up at near term technical resistance at $120, having just bounced off of technical support near $115, a level it has bounced from on two other occasions over the last few months, which also happens to be the one year uptrend:[caption id="attachment_69271" align="aligncenter" width="600"] FB 1yr chart from Bloomberg[/caption]
There was a trade in the options market that caught my eye shortly before noon. When FB was trading $119.50, there was an opening buyer of 2000 of the Feb 10th weekly 121 calls for $3.71, making a break-even on these calls at $124.71, up 4.3% from the trading levels.
Short dated options prices have exploded in FB, nearing levels last seen prior to their Q3 report in late Oct, and they are likely to go up as we get closer to the next identifiable catalyst, Q4 earnings on Feb 1st. The chart below shows realized volatility (white line, how much the stock has been moving) and the widening spread between implied volatility (the price of options- blue line):[caption id="attachment_69272" align="aligncenter" width="600"] Bloomberg[/caption]
Given the stock’s poor relative performance over the last couple months, investors dissatisfaction with the company’s guidance on spending back in Oct, and the potential for disappointment on earnings makes sense, but buying outright calls may not be the best way to define risk.
Stock Alternative in lieu of 100 shares of FB (120)
Buy the Feb3rd 120/130/135 (unbalanced) call fly for 2.80
- Buy 1 Feb3rd 120 call for 4.10
- Sell 2 Feb3rd 130 calls at .80 (1.60 total)
- Buy 1 Feb3rd 135 call for .30
Rationale – This call fly has a breakeven of 122.80, above that level the profit potential at 130 is 7.20. Above that with the 135 call (rather than the 140 call on a balanced fly) you cannot lose money, even if the stock goes to new highs above 135. Therefore this is even more bullish than a balanced call fly as there is no risk to the upside. (at 135 or above the fly would be a 2.20 profit). Where this trade makes sense is for those looking to replace existing FB stock, or those that were looking to buy the stock into earnings (due Feb 1st after market close) as it defines risk to just 2.80, much less than the implied move between now and then. On the upside 130 is a realistic area to target and this trade lowers the breakeven from the large trade detailed above (the Feb10th 121 calls) from 124.71 to just 122.80, almost 2 dollars lower.