Tuesday, April 8, 2014

Facebook (FB) - Earnings Preview: Has the Option Market Under-priced Risk?



FB is trading $58.51, up 2.7% with IV30™ down 7.2%. The Symbol Summary is included below.

Provided by Livevol

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Update 4-9-2014

Provided by Livevol
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This is a pre-earnings note, specifically focused on FB volatility and asking the question:

Is Facebook implied volatility too low?  I also note, FB has the highest price/Sales ratio of any stock in the S&P 500 at 18.5, with the S&P at 1.7.  And yes, sales for FB are projected to grow massively in the next year, but that number is still out there.

Here's a link to the same question I asked about NFLX:

2-13-2014:
NFLX - Unprecedented Low Risk?... How Many Times Will the Option Market Prove Wrong?


3-24-2014:
NFLX - How the Option Market Totally Blew It... And We Knew it a Month Ago.


2-13-2014: NFLX Symbol Summary

Provided by Livevol

4-4-2014: NFLX Symbol Summary

Provided by Livevol

Yeah, the vol was too low in NFLX.

So, let's start with the Charts Tab (two-years) for FB. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

On the stock side we can see the huge price appreciation off of the lows, and then the most recent stock drop which as plagued technology in general and momentum stocks in particular.

Now, let;s focus on the implied volatility (risk as reflected by the option market).

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

We can see the ebbs and flows surrounding earnings; note that the blue "E" icons represent earnings dates.  What I really want to focus on is the level of the implied as of right now, with still two weeks to go before earnings.

I've drawn that yellow horizontal line to get a better feeling for where FB vol sits now relative to its total option trading history.  On an annual basis, the IV30™ is in the 56th percentile, so right about middle of the road.  Given the recent stock drop, possible momentum deflation and earnings event, one could argue that's too low.

Let's take an even closer look at the vol, same time frame, this time with just the earnings dates (and today) highlighted.

Provided by Livevol

A couple of things to note:
1. The current IV30™ is below five of the last seven earnings dates.  But, give that time, vol will rise into the event.

2. There is an almost hypnotic pattern to the vol into earnings.  It was decreasing in literally a straight line for five quarters, then popped, and now seems to be following that straight line decline again.  If the implied for FB doesn't get over the level from the prior earnings period, I think that might be too low.

The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

For the expiry into earnings (Apr25 weeklies), we can see a totally normal skew shape.  Oddly, it shouldn't necessarily be "normal" into an earnings event.  Often times we'll find parabolic skew, reflecting both upside and downside tail risk.  Add to the story that there has been a recent stock decline... I actually find this skew shape puzzling.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

Looking at the Apr 25 weekly $57.5 strike straddle, the option market prices FB to be in the range [$49.5, $65.5] on expiration.  I guess we'll see.

This is trade analysis, not a recommendation.






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