Facebook: Anatomy Of An Options Trade

If you’ve read my previous articles, then you know I’m a Facebook (FB) bull. I’ve always thought that Facebook had what it took to succeed where other similar social sites like MySpace have failed. To my point, they have accomplished the following very quickly:

• Obtained a massive user-base applying social psychology to grow very quickly (link)
• Embraced Mobile As a Primary Platform (link)
• Targeted Social Advertising and Massive User Engagement (link)

Specifically, they can handle the growth and every move they make is well considered in light of the impact on their user base. They’ve now proven they can monetize their users.

I wrote a previous article about Google’s (GOOG) scalability (link) and how that’s a part of their culture but honestly, I could have applied that same ruler to Facebook as well. For all these reasons, I don’t see Facebook going away anytime soon and I believe these are the reasons why Facebook is surprising the market and has our attention.

An Options Trade Gone Right

In the middle of all the uncertainty of last week, I executed a Facebook option trade that went very well and I wanted to share that with you.

This trade took place over the three day period from Tuesday to Thursday and happened much quicker than most of my trades.

Tuesday, August 27, 2013 – Bad News

On Tuesday morning, the market gapped down on news of a possible military action by the United States against Syria. I had been looking for another entry point for Facebook after taking profits as I still expected quite a bit of upside with positive results from future earnings. More importantly, I believed that the market was expecting good things as well.

After a review of the Facebook options chain, I selected the Nov $44 Calls and placed a limit order at $2.25. The price at the time was above $2.30 and the price was already well down from where it had been so I felt that was a good entry point.

Later that day the price dropped even more and my order was filled.

Wednesday, August 28, 2013 – Worse News

The S&P 500 had fallen from a high of $1669.51 on Monday to a low of $1627.41 on Wednesday morning. Facebook was significantly down from its Monday levels even though it had gapped up. When I checked the options prices, my Tuesday purchase was showing a loss. My Nov 44 Calls were down to $2.14.

I agonized over my next decision but I decided that if I could get the right price I’d double my position on the Nov 44 Calls. None of my reasons for being bullish had changed and social media tends to increase usage in times of global crisis so I entered a limit order for $2.00 flat on the off chance it would get filled.

Later that morning, my second order filled and I was now all in on my calls at both $2.25 and $2.00 respectively.

Throughout the day on Wednesday, Facebook continued to rally even though the S&P as a whole didn’t.

Thursday, August 29, 2013 – That Was Yesterday and Yesterday’s Gone

A position check on Thursday morning showed that I had a significant profit resulting from a gap up in Facebook’s stock price to $40.89.

Even though the market hadn’t recovered from the news I had an order set to sell higher but with the current uncertainty I decided I wanted to take my profits and close out my position. I sold all my contracts at $2.59 at a 21.88% profit.

Post-Mortem Analysis

On Friday, Facebook gapped up even higher indicating I could’ve probably gotten a few more points out of my trade but all things considered I’m happy with my exit.

Facebook ended up closing lower returning most of its gains either from profit-taking or continued nervousness by investors. Incidentally, the Facebook Nov 44 Calls are selling for $2.40 as of the time of this article.

Conclusion

Facebook still has a lot of upside in its stock and I will continue to look for entry points to execute trades. I’m hoping for more opportunities in the coming weeks resulting a bit from investor nervousness over tapering but specifically from the potential for a US strike against Syria.

Regardless of what the coming weeks bring, I’m nervous about how investor’s will receive the Facebook earnings in October. Analysts are estimating $0.18 EPS but even with a meet or a slight beat, it seems possible that this has already been priced into the stock. For this reason, I plan on structuring my trades to leverage the anticipated run-up prior to earnings but plan on hedging through the earnings announcement.

I thought quite a bit about this article and nearly decided not to write it, but I’m hoping it will provoke discussions on the company and perhaps generate new trading ideas around this stock. I’m looking forward to your comments and feedback.