Facebook (FB) – FaceOff

by Dan May 10, 2018 11:06 am • Trade Ideas

Shares of Facebook (FB) have done a full stop V reversal of the revelation of the Cambridge Analytica data breach, today filling in the initial gap on the headline on March 16th, roundtripping a 20% decline from that date:


With the stock’s recent ascent, short-dated options prices have been cut in half, nearing levels that might appear cheap to those with a directional view on the stock, 30 day at the money implied volatility is at 21.5%, below the recent multi-year high of 43% and well below 30 day realized volatility of 37%:

The stock found a bottom on CEO Zuckerberg’s testimony before Congress last month and got a bit of an accelerant following the companies Q1 results and Q2 guidance that showed no signs of slower user engagement or advertisers trepidation in wake of the data scandal.

Back on April 25th in my earnings preview, I had the following to say on the topic:

I suspect it is still too early to see any “material impact” on the advertising front as the secular shift to mobile advertising is an indomitable force, and at the moment, FB is one of the only global platforms that have more than a 1 billion reach (they have 2 billion monthly active users) and their ROI for advertisers is far superior to any other platform because of that reach and engagement. So user growth and engagement would have to decline meaningfully for advertisers to materially reduce their spend. RBC’s Internet analyst Mark Mahaney succinctly framed how this topic will impact the stock near term:

Based on intra-quarter data points, channel checks, our proprietary survey work, and our model sensitivity work, we view current Street Q1 estimates as reasonable, though we believe the very recent negative publicity may have removed “upside” ad revenue opportunities and likely added uncertainty around user engagement and growth.

So there were not really expectations that we would see any material adverse effects in their results and guidance. What is very clear to me, despite the stock’s bounce, is that this issue is not over in 2018 for Facebook, and any hint of regulation in the U.S. coming down the pike (Europe’s GDPR starts May 25th), and increased spending to better protect user data and decreased revenues that may result from new regs and policies could way on the shares, or at least keep it rangebound.

The next identifiable catalyst (and I suspect there are others that we are not going to know their date) for Facebook will be their Q2 earnings that should fall the first week of August.

If I were inclined to play for a move back towards the April lows I might consider the following trade structure:

Trade Idea: FB ($185) Buy August 180 / 150 / 120 Put Butterfly for $5

-Buy to open 1 Aug 180 put for 7.70

-Sell to open 2 Aug 150 puts at 1.45 each or 2.90 total

-Buy to open 1 Aug 120 put for 20 cents

Break-even on Aug expiration:

Profits of up to 25 between 175 and 125 with max gain of 25 at 150

Losses of up to 5 between 175 and 180 & between 120 and 125 with max loss of 5 above 180 or below 120

Rationale: This trade idea offers a very wide range of potential profitability to the downside while also mitigating the potential for options prices to come in over the course of the summer while also targeting Q2 earnings. Also the risk 5 to make up to 25 is an attractive potential payout on a contrarian bet like this.