Wednesday, November 14, 2012

Facebook (FB) - Largest Lock-up Period Ends But Stock Rises and Vol Falls; Is Vol too Low?

FB is trading $21.89, up 10.2% with IV30™ down 6.3%. The LIVEVOL® Pro Summary is below.


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Facebook, Inc. (Facebook) is engaged in building products to create utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about. Ya know... it's Facebook...

This is a stock and vol note -- but really it's focused on the lock up period ending that will essentially double the number of shares of FB on the market. But... the stock is up and vol is down.

Here are some news snippets to paint the picture of the happs:

Pssst... wanna buy 804,000,000 shares of Facebook (FB)?

Shareholders of the social networking king hope the answer to the above is yes, as yet another share lock-up ends today. It's the latest in a series of shares freed up for early investors to sell in the open market. The 804 million shares potentially coming for sale today compare to 500mm in other post-IPO sales and 421 million shares at the $38 IPO price last May.

With Facebook's stock down nearly 50% from its IPO price and still groping for a bottom, the question is why outsiders would once again want to line up to buy what savvy insiders with greater information want to sell. On August 16th 271 million shares held by investors and directors involved in the IPO were unlocked and shares dropped 6% on massive volumes, closing in the teens for the first time.

Today marks the biggest potential liquidity event remaining in the company's roughly 1.5 billion post-IPO share release.

Source: Yahoo! Breakout via Yahoo! Finance; Facebook Shares: Should Outsiders Buy What Insiders Are Selling?, written by Jeff Macke.

The thing is, FB is up kinda size on the news. Here's some more news/analysis:

In August, Yelp shares skyrocketed by 25% the day its lockup restrictions on insiders expired.

Well, the same storyline played out today for Facebook, with shares jumping by as much as 11% on its own IPO lockup expiration.

We're talking about a total of 804 million shares that are now permitted to roam around the cabin freely. This is by far the biggest block of shares related to the IPO that are being unshackled, so most were expecting some selling pressure. That nearly doubles the amount of shares floating around out there, which was approximately 921 million before today.

Just because insiders can sell doesn't mean they have to, and the lack of selling pressure today implies they think shares are too cheap. That's a positive side for us outsider investors who aren't privy to as much detail to Facebook's inner workings.

This lockup is the biggest but it's also not the last. There are two more lockup expirations on the horizon,

Source: The Motley Fool via Yahoo! Finance; Facebook Sends the Lockup Expiration Bears Packing, written by Evan Niu, CFA.

All very odd... Let's look to the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can see the poor performance since IPO that's been widely discussed. The close on day 1 of public trading for FB was $38.23 (with an intra-day high price of $45). As of this writing, the stock is down 43% from it's opening day close. The all-time range in stock price for FB is [$17.55, $45.00]. I do note that the last earnings release was 10-23-2012 AMC and the next day the stock popped from $19.50 to $23.23 or just under 20% in a day.

In order to examine the vol a little more closely, I've included the IV30™ chart in isolation.

We can see how elevated the implied got into earnings (note the blue "E" icon). But more than that, check out the recent drop in vol. While other lock-up periods have shown rising vol (and dipping stock), today we see the complete opposite. The all-time range in IV30™ for FB is [44.74%, 81.51%], putting the current level in the 11th percentile.

Let's turn to the Skew Tab.

That Nov vol is a little misleading since it represents 2.5 trading days, but we can see how Dec and Jan'13 essentially lie right on top of each other. There really is no sign of a big event occurring today at all in the skew or term-stucure. So maybe this just isn't a big deal?...

Finally, let's turn to the Options Tab.

Across the top we can see the monthly vols are priced to 63.94%, 49.26% and 48.92 for Nov, Dec and Jan'13. I also note the vol changes on the day are -26.4, -2.8 and -2.8 vol points respectively for the same three expiries. So, the option market reflects less risk moving forward (the news is over -- the shares are out) and an implied in the 11th percentile, while the equity market reflects... a higher valuation...

I don't really know, but, should the implied really be near the bottom decile with the stock up double digit % on the day and shares outstanding doubling? What about systematic risk -- fiscal cliff?... No?...

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