Thursday, June 7, 2012

FB: Implied volatility

Facebook Inc. (FB) hit a low of $25.52 on Wednesday, 39% below its opening price when it began trading on May 18.

Today, an interesting thing happened: FB's implied volatility sank like a stone, from an all-time peak of 64% on Wednesday down to today's 58%.

It's only the second time that implied volatility declined since FB began trading. The first was on May 31, a one day drop that was not of the magnitude of today's decline.

Implied volatility is a measure of options risk. It's an annualized percentage that tracks the odds that options traders are building in to their pricing as they bid and ask for contracts.

The implied volatility for the market's premier index, the S&P 500, is called the VIX. When the VIX goes down, the market goes up, and vice versa. It's quite an accurate counter-trend indicator.

FB's price rose for the third time since trading began. The first two times the rise reversed quickly. The question here is whether the selling pressure has at last been exhausted.

As I have said often in this venue, I have no crystal ball. Here are some facts:
  • This June 5-6 two-day rise has carried 7.2%, the largest ever. The May 30-31 rise was 6.5%, and the May 23-24 rise was 5.9%.
  • Volume rose with the price this time, as it did on May 31. The earlier volume spike was greater than Wednesday's, but it was not accompanied by a falling implied volatility.
Those facts together suggest the possiblity that sellers have become less eager at these prices.

So let's put some structure on the chart:
  • FB has recorded an all-time low and a higher high. That's the start of an uptrend, but would require a higher low and then a still higher high for confirmation.
  • The next reversal high is $27.76, set on June 5, a wider trading day that engulfed the narrower range of the day before. That reversal level counts as a resistance.
  • The next reversal was $29.67, the May 31 spike, and it also counts as resistance.
FB is now trading at $27.11 (as of about 3:15 p.m. Eastern). That means the price has 2.4% before hitting first resistance and 9.4% before the second, higher volume resistance. That's room for some good profit if in fact the uptrend continues.

Decision for my account: I'm not trading FB now, fascinating though it is. I want to see some serious uptrend before committing money. But, given the liquidity of the options and the consequent leverage, it's a very interesting play. i'll keep my eyes on it.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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