The Volatility Blip in Facebook

I figure, by the time Congress tells Wall Street how to price IPO’s because of the Facebook slide, the name will already be trading $40.  Then, of course, the whole conversation will be moot.  It is one of the rare funnies on CSPAN to catch that kind of testimony.  I can just picture the questions now, “How come you did not charge less for the IPO, the customers would have been happier?”  Not the investment bank customers, mind you, but FB is starting to heat up again as is the way with names that have hyper growth potential.

The FB earnings scenario is starting to play out.  This post was prompted by an Option Pit client looking into some time spreads.  Note, the Term Structure in FB.  The August is bid to about 61% IV.  That is a good chunk more than the other months.  I have FB announcing earnings when they were a quasi public company around late April.  I don’t have an exact date for the next cycle, but the market seems to think that August time frame is about right.

The time spreads that look good right now, buying Sep and selling August could be a very long wait.  If August ends up being earnings month, 61% volatility will be on the low side.  An interesting trade is shaping up in July.  I think the IV can get to the mid- 40s there, as investors wait for the earnings.  45% IV for FB is very cheap, and I would look to scoop some options there.  You could even finance it with the expiring June Quarterlys.

The Trade

Buy Jun Quarterly/July time spreads for the OTM calls and puts (strangle swap) or wait till the IV closes down a bit more in FB in July.  Sometimes these pre earnings options have a nice way of surprising on the upside.

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