Wednesday, April 27, 2016

FB Analysis

Update 6/7/2016: FB gapped up 7.2% immediately after earnings were published. It remained fluctuating on the upper boundary of the profit zone until a slight decline today, coupled with the helpful ravages of declining implied volatility and time decay, triggered an exit.

Profit reached 57% of ts maximum potential; my trigger level is 50%. Odds of expiring out of the money for maximum profit were 83.5% at entry. At exit the odds had declined to 60.9%.

FB shares rose by 9.8% over 41 days, or a +87% annual rate. The options position produced a 128.3% yield on debit for a +1,142% 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 JUN series of options, which trades for the last time 51 days hence, on June 18.


Implied volatility stands at 42%, which is 2.9 times the VIX, a measure of volatility of the S&P 500 index. FB’s volatility stands in the 60th percentile of its most recent range. The price used for analysis was $107.25.

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

Options as a Strategic Investment
by Lawrence G. McMillan

The Trade

FB has been in a downtrend since Feb. 2, having experienced a short, sharp decline in a period of days, then beginning Feb. 9 worked it self back up to a lower high on March 30 before beginning a fresh measured decline. The price remains well above the Feb. 9 low.

The chart at present is consistent with both the beginning of a downtrend or a second leg in a sideways movement. There is no way to tell at this point.

Brokerages are wildly enthusiastic about FB's prospects, in aggregate coming down with a 78% enthusiasm with 82% of 27 analysts issuing strong-buy recommendations.

The chart doesn't match the Street opinion and hasn't for nearly three months. Given that discrepancy, I shall go with a direction neutral strategy.

Iron condor, short the $120 calls and long the $125 calls,
short the $95 puts and long the $90 puts,
sold for a credit and expiring June 19.
Probability of expiring out-of-the-money

The premium is $1.37, which is 28% of the width of the position’s wings. The stock at the time of entry was priced at $107.41.

The risk/reward ratio is 2.6:1.

The zone of profit in the proposed trade covers a $12.50 move either way. The biggest immediate move after each of the past four earnings announcements was $14.66, and the average was $5.87. After eliminating the maximum and minimum post-earnings movements, the core tendency is $3.52.

Decision for My Account

I have opened a position on FB as described above.

-- Tim Bovee, Portland, Oregon, April 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 practioner 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


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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.

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