Tuesday, April 22, 2014

Facebook (FB): Earnings Preview: Option Market Reads: "Oh, yeah, that's happening..."

FB closed Tuesday trading at $63.03, up 2.9% with IV30™ down 6.6%. The Symbol Summary is included below.

Provided by Livevol

This is a pre-earnings note.  You can read prior notes this quarter below:

Apple (AAPL) - Earnings Preview: An Astonishing and Unprecedented Phenomenon is Happening Right Now.

Microsoft (MSFT) - Earnings Preview: Cash Rich, Dividend Payer, Stock Up 50%... What Now?

Netflix (NFLX) - Earnings Preview: My Bologna Has a First Name: c.o.m.p.e.t.i.t.i.o.n.; A Reckoning is Coming with Earnings.

Illumina (ILMN) - Volatility Explodes to Multi-year Highs Ahead of Earnings. Skew Reverse; Bends Backwards.

Google (GOOG) - Earnings Preview: Highest Risk in Nearly 2-years. A Market Moving Event.

Let's turn to FB and start with the Charts Tab (two-years), below. 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 price appreciation.  As of right now, FB's market cap is $160B which puts somewhere in the realm of one of the twenty largest firms in the United States.  The market cap for C is $145B.  The market cap of KO is $178B.

We can see the stock has had that drop off from its highs, just like many of the technology momentum stocks.  We can also see the recent upswing -- either the MOMO bubble deflation is over, or it's on pause.  The VIX spot closed at 13.19%, so the SPX reads: "Really low risk right now."

As for FB, let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The blue "E" icons represent prior earnings dates and we can see that FB vol has been climbing into this earnings event (which is expected).  Oddly, on an annual level, FB vol is in the 54th percentile -- so kind of middle of the road.  That number is a little wacky b/c of the peak two earnings cycles ago, but still, the risk reflected in FB shares right now is at the very least not high...

Let's focus on the prior earnings cycles and look to the same chart with just that data.

Provided by Livevol

We can see the there is a trend of lower risk into earnings for the last three cycles (including this one).  FB actually had a rather monotonic drop in risk per earnings cycle for its first five releases as a public company.  then it popped, and has now begun to drop again.

Unlike a lot of the prior earnings notes I have written about, the overall level in FB vol isn't crazy remarkable to me.  But this next image is.

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

Provided by Livevol

This is one of the weirdest skew shapes i have ever seen for a mega cap ahead of earnings (and yes, FB is now a mega cap).  The downside puts are not more expensive than the at-the-money (ATM), which is not only weird, I don't think I've ever seen it  before in this context.

The option market couldn't be more blase about this earnings report per the skew.  Honestly, it's almost like a dude walked by and said, "Oh, yeah, that's happening..."

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

The option market reads a price range of [$57, $69] by Apr 25th.

  • 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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