Did the FB options out price the earnings?
The big surprise today is that the economy shrank in the 4th quarter of 2012. The market did not really care most of the day, as the SPX traded a near term high of 1509.54. The fact that the government is starting to reduce its influence on the economy is probably for the best. If we get out for just modest declines in GDP, that will bode better in the long term. Take the short term medicine now versus a big slug in 4 years. What I think this does is draw a picture of lower realized market volatility for a while. It might not stay at 4% like it is but it could stay in the low 10’s. That brings me to the Facebook trading.
I like this 3D view to look at market activity across an option class (full disclosure- I have a patent pending with 2 the two lead designers on this 3D view) to look for spreads. The IV is denoted by the height of the buildings and the implied volatility change by the color. No doubt the IV in FB was up today going into earnings. With 3 days to go, the IV in the near term week was off the charts. That also made the one week time spreads very compelling trades with risk for entry at .12 -.15 for a 1 week hold. We thought this got a little to giddy pushing the prices of the time spreads into the floor.
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Livevol (R) www.livevol.com Note that 45% is not a bad place to own IV in FB.
As I write this, FB is trading around 31.20 down .04 from the close on what I think was pretty solid earnings. Who knows where it will be tomorrow but FB looks like one of the few big names that did not outperform the straddle price. That is probably best in the long run for the stock since it is becoming what it probably should have been in the first place, a solid growth company with giant potential but it still has to get there one step at a time. Sometimes the options forget that.
We had a couple of positions on in our Strategy Letter that look ok in FB. I think going forward I like the Weekly time spreads for the theta. If the market doesn’t tank on 0% GDP growth maybe we have a little bull around. Bull Markets love time spreads.
We will be discussing positioning into NFP tomorrow on the Pit Report. Ask Anna for a 1 day trial at firstname.lastname@example.org.
I have multiple FB positions.
If you would like to see how to position this stuff, check out or Pit Report from today.
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