* Facebook (FB) - Earnings Preview and a Reminder: This Isn't Social Media, this is a Giant of Technology

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FB is trading $66.98, down 1.6% with IV30™ up 1.2%. The Symbol Summary is included below.

Provided by Livevol

This is a price and volatility note with a look forward to earnings in a few weeks.  I will revisit FB a day or two head of earnings when the risk is clearly delineated by the option market. Let's consider this the warm up.

My most recent post on FB is relevant to this discussion and I have included it below
FB - Transformation: This Isn't Social Media, this is a Giant of Technology.

A snippet from that post:
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For the record, here is a smattering of firms that FB is now larger than (as of June 10, 2014):

• Bank of America (BAC)
• Citigroup(C)
• Intel (INTC)
• Disney (DIS)
• Comcast Corporation (CMCSA)
• Cisco Systems (CSCO)

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OK, back to the present... First, the all-time stock chart is included below.

Provided by Charles Schwab optionsXpress

Several phenomena to note:
1. FB is up 75% since going public
2. The all-time high is $72.59
3. The stock is rising after its hiccup that took the price below $60 in April.
4. FB is not TWTR, TSLA, NFLX, GOGO, PLUG or any other favorite MOMO name.  FB is ~15th largest company in the United States. The stock is not moving like crazy guys, this is not the same subject, the same story or the same type of company.

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

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

The blue "E" icons represent earnings dates and we can see that for the first four earnings releases risk continued to drop ahead other news.  That's quite normal for a company after it goes public.

Oddly, the risk popped for the fifth earnings release and now has started its decline again through the last two cycles.  All those words are captured by the yellow arrows in the chart above.

As of right now the implied volatility in FB is quite low.  But... that's a 30-day look head weighted average, the risk into earnings is substantially higher and we will see that red curve rise almost everyday into the earnings event on 7-23-2014 (after market close).

The questions are two-fold:
1. How high will the risk go?
2. How high should the risk go?

Good questions, both.  Answers... gimme a couple of weeks.  But, there is something we can answer now, which is how much risk is priced into earnings relative to non-earnings options.

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

Provided by Livevol

With earnings due out on 7-23, the July 25 weekly options have that event while the July monthly options (expiring July 18th) do not. The volatility difference between those two expiries is earnings.  One of the most beautiful parts of option trading is the forward looking risk and the ability to price the risk into earnings (or any event) relative to the current time... it's really quite pretty.

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

Using the at-the-money (ATM) straddle for the Jul 25 weekly options we can see that the option market reflects a price range of [$60.30, $73.70] after earnings.

• If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
• If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
• If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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