Facebook (FB) stock has been stuck in the mud a bit since the Summer, generally trading sideways in a 165-175 range. It threatened a breakdown in late September, and then a breakout just last week, but both moves failed and the stock remains within the range (albeit on the upper end, trading 173 today). The company reports Q3 earnings on November 1st.
In early October we took a look at the stock and based upon the range bound nature of the past few months, we thought it wise for those looking ahead to Q3 earnings to take advantage of lack of movement by financing those views with the sale of October options to help finance directional bets into the event. Here were those two trade ideas, from when the stock was in the same spot it is today, first the Bullish, from Oct 9th:
FB ($)173 Buy the Oct/Nov 3rd call calendar for 2.50
- sell 1 Oct 177.5 call at .85
- buy 1 the Nov3rd weekly (that capture earnings) call for 3.35
With the stock in the same place and the Oct calls expired (worthless) the trade is now just the Nov 177.5 calls, currently trading 2.40 (vs the 2.50 initial cost). So this calendar did what it was supposed to do and fought the decay, the .85 collected in Oct numbed the pain of the .95 lost in the Nov 3rds. But as far as trade management goes we don’t want to leave this call naked. Right now the easiest path is probably to sell either the Nov3rd 182.5 or 185 calls to create a spread. The 182.5 calls can be sold at around 1.00, leaving a 5 wide call spread for about 1.50, with the possibility of making up to 3.50 on a move above 182.50. The other option, and one I like a little more is to roll down a strike and recreate the calendar on the 175 strike, by selling this week’s 175 calls to finance next week’s. The issue with that is it adds some risk (costs an additional .30) but it sets up a lot better and offers some optionality after this week where that additional risk can be reduced if the Oct27th 175 calls expire worthless.
Now to the put calendar:
FB ($173) Buy the Oct/Nov3rd 167.50 put spread for 2.25
- sell the Oct 167.50 puts at .75
- buy the Nov 3rd 167.50 puts for 3.00
With the stock 173 this has bled a little more and is worth about 2.15. The situation is the same where the easiest thing is to create a vertical spread to reduce risk, by selling the Nov3rd 162.5 puts at just under a dollar. But again, a more interesting roll may be to come up a strike and recreate the calendar, selling this week’s 170 puts to buy next week’s. That roll costs a little, and therefore adds risk but if the 170 put this week expires worthless it can then be turned into a vertical into the event on a very tight strike set up well into the event.