Wednesday, November 2, 2016

FB Analysis

Update 12/2/2016: FB gapped down sharply after missing the Street's earnings expectations by a significant margin and has remained well below profitable levels ever since.

Shares declined by 10.1% over the life of the position, or a -123% annual rate. The options position produced a -63.6% loss on debit for a -774% 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 DEC series of options, which trades for the last time 44 days hence, on Dec. 16.


Implied volatility stands at 34%, which is 1.7 times the VIX, a measure of volatility of the S&P 500 index. FB’s volatility stands in the 54th percentile of its annual range. The price used for analysis was 128.09.

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

The Trade

FB has been in an uptrend since September 2012, a few month after going public, with an impulse so strong that I find it hard to distinguish the Elliott wave count.

The Price of Prosperity: Why Rich Nations Fail and How to Renew Them
Todd G. Buchholz

Zacks Investment Research gives FB a bearish rating, with no indication of late analytical changes that might indicate an earnings surprise.

Brokerages in aggregate give FB an extremely strong enthusiasm rating of 73%, with 80% of 30 analysts issuing strong buy recommendations.

The stock's price has risen immediately after each of the last four earnings announcements.

I shall structure the trade as a bull spread.

Bull put spread, short the $125 puts and long the $120 puts,
sold for a credit and expiring 
Dec. 17.
Probability of expiring out-of-the-money


The premium is $1.62, which is 32% of the width of the position’s wings.

The risk/reward ratio is 2.1:1.

The zone of profit provides coverage $3.20 below the entry price and unlimited to the upside. The biggest immediate move after each of the past four earnings announcements was $14.66, and the average was $7.25. After eliminating the maximum and minimum post-earnings movements, the central tendency is $6.33.

Decision for My Account

I have entered a position on FB as described above. The stock at the time of entry was priced at $28.80.

-- Tim Bovee, Portland, Oregon, Nov. 2, 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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