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Options Investors See Good Times Rolling for Facebook

Thursday, 23 October 2014 07:52 PM

Facebook Inc. investors who have grown accustomed to wild swings in the company's shares following its earnings reports are looking for relative calm on Tuesday, when the social media company posts third-quarter results.

The cost of a Facebook straddle, in which an investor buys an at-the-money put option and a similar call option, suggests a move of about 7 percent in either direction by Oct. 31.

That is short of the average move of about 10 percent in Facebook shares the day after the company reported results in the last eight quarters. The stock jumped as much as 14 percent in January, and nearly 30 percent in July last year when the company posted strong mobile advertising revenue.

Given that average, the price of the straddle seems cheap, WhatsTrading.com options strategist Fred Ruffy said.

Facebook's last two earnings reports showed growing strength in its mobile advertising business and have helped push the company's shares up nearly 31 percent over the last six months. The Standard & Poor's 500 index rose 3.5 percent over that period.

On Tuesday, Facebook investors will be looking for continuing signs that mobile ads are translating into revenue, to gauge if the company can keep up its recent momentum, said Baird Equity Research analyst Colin Sebastian.

Facebook was the second busiest name in the options market on Thursday, with 191,000 calls and 153,000 puts traded, according to Livevol Inc data.

Ophir Gottlieb, chief executive of Los Angeles-based Capital Market Laboratories LLC, argues that the relatively calm expectations for Facebook leaves the market exposed in case of a disappointment.

"The risk into Facebook's earnings is just about lower than it has ever been into an earnings report, while at the same time the stock is trading at an all-time high," he said.

The company's 30-day implied volatility, a measure of the risk of big moves in a stock, was at 40.53 percent on Thursday, in the 31st percentile of its 52-week range, Livevol data showed. That implies low expectations for wild gyrations next week, and any deviation from that could hit shares hard.

With people increasingly accessing the Internet from smartphones and tablets, companies such as Facebook, Google Inc and Twitter Inc have been looking for ways to generate more revenue from mobile devices.

"We think Facebook had a solid quarter and all of our checks appear to be positive," Sebastian said.

Facebook shares rose 3 percent Thursday to a new year-high of $80.63.

© 2020 Thomson/Reuters. All rights reserved.

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Facebook Inc. investors accustomed to wild swings in the company's shares following its earnings reports are looking for relative calm on Tuesday, when the social media company posts results.
Options, Investors, Times, Facebook
Thursday, 23 October 2014 07:52 PM
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