Facebook (FB) – (Anti)trust me!

Company Description

The company provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. The company’s products include Facebook that enables people to connect, share, discover, and communicate with each other on mobile devices and personal computers; Instagram, a community for sharing photos, videos, and messages; Messenger, a messaging application for people to connect with friends, family, groups, and businesses across platforms and devices; and WhatsApp, a messaging application for use by people and businesses to communicate in a private way. It also provides Oculus, a hardware, software, and developer ecosystem, which allows people to come together and connect with each other through its Oculus virtual reality products. As of December 31, 2018, it had approximately 1.52 billion daily active users. The company was founded in 2004 and is headquartered in Menlo Park, California.

Charts

Option Pricing

  • Implied Volatility (expected price movement) for short-dated options is 37%
  • Realized Volatility (historic price movement) for short-dated options is 36%
  • Implied Volatility Percentile for short-dated options is 79%

Options Action

Options traders were in overdrive yesterday. In total 700k options were exchanged. Around 437K calls and 264k puts have been traded. Today’s call heavy session is nothing new for FB traders. At the Chicago Board Options Exchange (CBOE), NASDAQ OMX PHLX (PHLX), and International Securities Exchange (ISE) the underlying’s 10-day call/put volume ratio of 2.08 is in the 76th percentile of its 52-week range. Indicating that calls have been bought to open over puts at an accelerated clip.

Trade Idea

What happened?

Antitrust Troubles Snowball for Tech Giants as Lawmakers Join In. The federal government is stepping up its scrutiny of the world’s biggest tech companies, leaving them vulnerable to new rules and federal lawsuits. Regulators are divvying up antitrust oversight of the Silicon Valley giants and lawmakers are investigating whether they have stifled competition and hurt consumers. Lawmakers in the House said on Monday that they were looking into the tech giants’ possible anti-competitive behavior. 

Our thinking:

Facebook stock closed ~7.5% lower at $164.15 on Monday. Recent price action has pushed FB back below its $500B market cap. With that said, the company has bested the broader market (SPX) by 14.9% YTD. If I were to take a position, I would be looking to take advantage of elevated implied volatility levels for short-dated options. I would be looking at an undefined risk strategy such as a short strangle. For example:

SideQtyExpStrikeType
Sell1JUL180Call
Sell1JUL150Put

Risk Profile:

There are 2 break-even points for the short strangle position on July expiration.

  • Upper Breakeven Point = 185.05
  • Lower Breakeven Point = 144.95

Profits: the short strangle makes up to $5.05 between the two break-even points.

Losses: large losses for the short strangle can be experienced when the underlying stock price makes a strong move either upwards or downwards past the short strikes.

Rationale:

Option markets imply a 64% probability of success for the structure at time of writing.  If the stock is able to stabilize between the short strikes, the July calls will decay as volatility comes in and theta (time decay) picks up. If I were to trade this structure, I would be looking to manage the trade at 25% profits and close the position if the structure has an end of day at a value that is 2x the net premium collected.

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