(for now) is the world's number one social networking
company. Their global reach and network encompasses roughly
900 million people and many Facebookers stay on for hours at a
time. There is no doubt that they have a captive audience and
a high level of participation among their users.
Interestingly enough, everyone and their mother wanted in at the
IPO and now all of them are underwater and most are looking for the
"dislike" button on thier holdings.
Despite the drop and uncertain future, there is still a lure to
the company. Not because they are making tons of
money or because CEO Mark Zuckerberg is the only executive
that can wear hoodies to press conferences and get away with it.
No, investors still support Facebook because of its potential to
monetize the extraordinary amount, depth and accuracy of data that
they have access to every millisecond. The NSA would be
envious of Facebook's databases. Google may know what you
like to wear; but Facebook knows what's in your diary.
When Facebook figures out a way to monetize that data without
overly disturbing their users and ruining their experience, that's
where they will win. For now they are still trying to figure
things out; running regression models, programming adjustments and
marketing tests to find the secret sauce.
The problem I see is that there will be many bad batches of
sauce before they can even get close to one that's perfect, if at
Zynga's huge disappointment and subsequent 40% slice in stock
price was blamed largely on Facebook, their algorithm and
Whatever you think of Facebook, I wanted to take a moment to
review the fundamentals and let you in on what option traders are
thinking in terms of an outcome tonight.
FB is a
Zacks Rank #4
(Sell) and is currently trading at roughly 80 times 2013 earnings,
which puts it in the "expensive" zone along with names like
Chipotle (before their last earnings report) and Travelzoo
when it was up at $95 per share (it's now at $20). Sure these
are completely different companies in different sectors, but growth
is growth and if you can't sustain it as a publicly traded company,
your shares are going to feel it.
The Zacks Consensus Estimate is for the stock to earn 9 cents in
Q2 with the most accurate estimate coming in at 5 cents, which
gives this stock a NEGATIVE ESP of 44%. This essentially
means that FB is not expected to "wow" investors tonight
Although, the ESP of 0 is likely due to the fact that they
In the past 60 days alone we have seen estimates from for the
current and next quarters as well as FY2012 and FY2013; this is
also not indicative of strength.
When you have a stock that has only traded for a couple months,
it's extremely difficult to determine a "normal" trading pattern of
volatility. It's common that options on new issues like FB
will have extremely high volatility.
That is no exception here! In fact, ahead of the report
the July options that expire tomorrow are trading at over 228%
volatility. In layman's terms, that would equate to a stock
that moves roughly 14% a day on average!
When I look at the July straddle (call and put), it tells me
that option traders are expecting at least a 10% move after
There is also a moderately bearish bias today, even after the
6.65% haircut the stock received after Zynga's report. The
majority of action I saw today was in the July 25 puts (expiring
tomorrow) that are expiring tomorrow; they traded almost 16,000
contracts before 1:00 eastern time. They were followed
closely in volume by the July 30 calls (expiring tomorrow) which
traded almost 15,000 contracts.
This could be a trader "collaring" the stock, which means they
buy the 25 put and sell the 30 call against shares that they
own. The trade can be put on for about even (no cost) and it
offers the trader absolute protection below $25.
It's a great little strategy, but is usually employed when a
trader is scared of a drop.
Looking at the facts, I think that might just be the best choice
in this case; because the Zacks Rank, the option pits and I all
believe that FB could be in for a little pullback tonight.
I might be a buyer of Zuck's project at $22.00; but we will
see what happens!
Don't ignore the underlying trends in the option markets.
Options are often where the "smart money" does a great deal of
trading because they can operate with a certain degree of
Remember that this is not a guarantee of market direction, nor
should you go and fire off a trade without conducting your own due
diligence. I am simply breaking down the logic of the trade
and putting the pieces together.
Just because someone buys 5,000 call options, doesn't mean that
they are bullish on the stock. Those calls could be purchased
as a hedge to a very large short position or they could be only a
part of a bearish spread that the trader is "legging" into.
The trader could also be closing out an existing BEARISH
By combining options action with solid fundamental data like the
Zacks Rank, it helps stack the odds in our favor of targeting the
real direction and intention of the big volume option players.
Jared Levy is the Senior Equities Strategist for Zacks.com and
editor of the
Whisper Trader Service
FACEBOOK INC-A (FB): Free Stock Analysis Report
ZYNGA INC (ZNGA): Free Stock Analysis Report
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