On Friday I detailed a defined risk bearish trade idea in Facebook (FB) into their Q2 results reported last night (read here) and on CNBC’s Options Action that afternoon:
Investors seemed fairly complacent into the print, with the stock closing at consecutive all-time highs in the days prior. My concern was that the writing has been on the wall dating back to November when the company highlighted the increase spend on investments in employees and AI, again on their Q1 call in April and again as recently as last week when CEO Mark Zuckerberg sat down with Recode’s Kara Swisher for an exclusive wide ranging interview on these very issues.
What was simple to me is that if the company, as they stated would dramatically increase spending in an effort to curb bad behavior on their platform, and that complying with new data regulations in Europe would stunt growth in the region, than it would lead to at least lower user growth, possible a decline in users, potentially lower ad rates, lower revenues, margins / profitability. The company’s forward guidance last night drove those points home (great rundown from Recode here) and this morning the chickens have come home to roost with the stock is down an astounding 19.3%, shedding more than $100 billion in market capitalization, the largest one day stock for a company ever.
Lets look at the trade idea detailed on Friday:
BEARISH TRADE IDEA: FB ($210) BUY AUG 210 / 190 PUT SPREAD FOR $5.50
-Buy 1 Aug 210 put for 7
-Sell 1 Aug 190 put at 1.50
With the stock at $175.50 the FB Aug 210/ 190 put spread can be sold at $18.50 for a $13.50 profit. If the stock is 190 or lower on Aug expiration the spread can only be worth $20, the distance between the strikes. At this point it makes little sense to stay long the spread to try to wring out the last buck-fifty.
Action: FB ($175.50) Sell to close Aug 210/190 Put Spread at $18.50 for a $13.50 profit.