Facebook (FB) Q4 Earnings Preview and Hedge Idea

by Dan January 31, 2018 2:42 pm • Trade Ideas

Facebook will report their Q4 results tonight after the close. The options market is implying about an $11 one day move tomorrow, or about 6% in either direction, which is fairly rich to the average of about 2% over the last four quarters, but in line with the average since its 2012 IPO.

Shares of FB are trading within 1% of its all-time high, now up 6.5% on the year in a month where the stock has experienced a little volatility. Up 6% in the first 100 days of January, only to give up those gains resulting from investor concerns regarding the moves the company will take to change their news feed as outlined by CEO Mark Zuckerberg in a Facebook post on January 11th. I suspect investors have reason to be concerned that the plan will cause costs to go up and ad revenue to go down as the company hopes to reorient its core product back towards your social network as opposed to spammy news and ads. But investors got over those concerns fairly quickly and within a week the stock filled in the entire gap and made a new all-time high.

What’s clear from the one year chart is that the stock is in a very well defined uptrend with decent support down about 10% at $170:

Taking a look at the five-year chart there is a fairly obvious downside target near $150, the intersection of the long-term uptrend and the mid-2017 consolidation, oh and there is no upside resistance:

The investment world is convinced that the stock is cheap relative to expected growth, trading 27x expected 2018 eps growth of 18% on 34% expected sales growth.

RBC’s star internet analyst Mark Mahaney highlights the following things to look for in FB’s quarter:

A material guide down given the company’s plans and the stock could easily be on its way back to near-term support in the $170s.

If I were long and looking to protect against a post-earnings drop I might consider a put spread collar, allowing for some further upside while also providing some downside protection.

for instance with the stock at $188:

vs 100 shares of FB ($188.00) Buy the Feb16th 200 call 185/170 put spread collar for 1.75
  • Sell 1 Feb16th 200 call at 2.15
  • Buy 1 Feb16th 185 put for 4.90
  • Sell 1 Feb16th 170 put at 1.00


Breakeven on Feb16th: 

Gains or losses in the stock between 185 and 200 (less 1.75 paid for the hedge)

Called away in the stock above 200 (at an effective price of 198.25)

Protection of up to 13.25 below 183.25 down to 170, losses in the stock below 170.

Rationale – For less than 1% of the price of the stock this hedge protects up to 7% in potential losses if the stock were to decline below 183.25. Below 170 protection ends but that is a fairly significant move from these levels. The 200 line call sale finances the put spread so a move above 200 means being called away in the stock, but that is also a significant move and the hedge can be closed with mark to market losses vs more significant gains in the stock if the stock threatened that level.