Wednesday, January 27, 2016

FB Analysis

Update 1/28/2016: FB rose sharply in the trading session after earnings were published and I exited for profit.

Shares rose by 10.6% in a day, or a +3,885% annual rate. The options position produced a +193.9% yield on debit for a +70,788% annual rate.

The social networking company Facebook Inc. (FB), headquartered in Menlo Park, California, will publish earnings on Wednesday after the closing bell.
[FB in Wikipedia]


I shall use the MAR series of options, which trades for the last time 51 days hence, on March 18.


Implied volatility stands at 45%, which is 1.9 times the VIX, a measure of volatility of the S&P 500 index. FB’s volatility stands in the 67th percentile of its most recent range. The price used in analysis was $96.09

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

FB has been in an uptrend since September 2012, the fifth month after the company went public. The trend hit a high on Nov. 5, 2015 and then reversed. However, it remains above the prior reversal low set during the China Panic of Aug. 24, 2015, and so according to the normal rules of chart analysis, the uptrend remains in place.

In two of the last four earnings announcements the price has closed higher in the next trading session.

Changes in analysts' assessment of FB suggest the likelihood of a positive earnings surprise.

Brokerages in aggregate award FB an extremely high enthusiasm of 79%, with 82% of 29 analysts issuing strong buy recommendations.

FB's beta is 0.86, meaning that it correlates with the S&P 500 but with somewhat narrower swings.

The choice here is how much credence to give to the expectation of an earnings surprise. It is based on work by Zacks Investment Research, which gives the forecasting method a 70% of being accurate, not bad odds at all.

Bull put spread, short the $95 puts and long the $92.50 puts,
sold for a credit and expiring March 19.
Probability of expiring out-of-the-money
The premium is $0.97, which is 39% of the width of the position’s wings. The stock at the time of entry was priced at $96.36.

The risk/reward ratio is 1.6:1.

The zone of profit in the proposed trade covers a $1.36 to the downside, meaning that a downward move will quickly turn the position unprofitable, although a move of any magnitude to the upside will make money.

The biggest immediate move after each of the past four earnings announcements was $4.82, and the average was $2.65. After eliminating the maximum and minimum post-earnings movements, the core tendency is $2.00.

The alternative would be a $110/$85 iron condor, which would cover the maximum post-earnings price movement and would provide about a 77% likelihood of profit to the upside. However, it would come at the cost of much greater risk of 4.7:1 in case the trade turned sour. Also, the high risk means that the potential profit wouldn't be worth my while.

Decision for My Account

I have opened a bull put spread position on FB as described above.

-- Tim Bovee, Portland, Oregon, Jan. 27, 2016


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


Two social media feeds provide notification whenever something new is posted.

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 decisions for his or her own account, and take responsibility for the consequences.

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at

No comments:

Post a Comment