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Options Flow Suggests Bullish Activity in Shares of Facebook

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Facebook (FB) stumbled late last week along with the broader market. The stock closed Friday trading for $54.45 per share and, after dropping to $54.05 this morning, is down 8.9% from the record levels of $59.32 per share seen intraday Wednesday. Looking forward, the social media company will be in focus midweek when earnings results are announced. One player in the options market seems to be anticipating positive news and opened a sizable spread trade on the stock ahead of the announcement.

A call spread buyer in Facebook on Friday was apparently taking advantage of 3% decline in shares and paid $1.08 for the Feb 55-57.5 call spread on a 60,000 by 45,000 ratio. The stock traded near $54.85 and the investor was buying 45,000 February 55 calls on FB for $3.70 and selling 60,000 February 57.5 calls for $2.62. Today's open interest numbers confirm that both legs of the spread were opening.

The massive ratio spread in FB is a rather bold play. The cash outlay is nearly $5 million and the options will expire worthless in less than four weeks if shares hold below $55. The potential payoff is a rather hefty $11.25 million if shares rally and settle at $57.5 (+6.4%) at the February expiration.

The timing of the spread is also noteworthy because Facebook is due to report earnings this week and the stock is sometimes a big earnings mover. For instance, shares were up nearly 30% on July 25, 2013 when the company reported two quarters ago.

The average daily move over the six quarters since the company has started releasing results is 11.6%. Another big move might be expected this time around, as implied volatility in the Weekly 1/31 options on the stock is near 134%, compared to 62% for the February options. The current implied volatility skew suggests a possible (one Sigma) post-earnings move of between $45.55 and $64.25 per share, or about +/-17%, for Facebook Thursday after the company reports Wednesday afternoon.

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At the time of publication, Henry Schwartz held no positions in the stocks or issues mentioned.


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