Schaeffer's Trading Floor Blog

Gauging Expectations Ahead of Facebook Inc (FB) Earnings

A look at sentiment in the options pits before FB's earnings release

by 5/1/2013 7:45 AM
Stocks quoted in this article:

Just when you thought earnings season was almost over… Facebook Inc (NASDAQ:FB) reports tonight!

The options board is predicting a 7.5% move tonight. That's actually on the low side for Facebook. Last quarter saw a 6.5% drop from close to open, but the quarter before that saw FB pop a whopping 23.5% on the open, while the quarter before that (summer 2012) saw a 13.6% drop. It's still a relatively new stock, so you'd expect earnings volatility to decline over time, but the options look pretty reasonable here.

That being said, implied volatility (IV) isn't exactly cheap, so you're really only getting a one-shot play on earnings. Here's 30-day IV in FB vs. 20-day realized volatility over the past year:

FB Implied Volatility vs Historical Volatility
Chart courtesy of IVolatility.com

It's likely IV will drop back into the mid-30's after the number, so it's Gap or Bust of you net buy in the ZuckerFest. It's pretty stunning how docile this stock has become. As of Thursday, IV will have pretty much halved since January, and realized volatility has lost nearly two-thirds from its highs in late 2012.

There's no particular directional bias to game. The stock has moved in a very, very slow downward channel since the last cycle. I tend to expect earnings reactions in the same direction as the overall trend, but the trend here is so tepid it's not really applicable. What's more, there's not outsized interest in either the put or call side. The Schaeffer's put/call open interest ratio (SOIR) is basically at the midpoint over the past year.

FB SOIR

And total open interest is back down to levels from last August.

FB Call and Put Open Interest Since June 2012
Chart courtesy of IVolatility.com

Throw it all together and it looks like no one's anticipating much of anything exciting tonight. It makes some sense in that FB is truly about what's *next*. If I had to trade it, I'd probably just go long some paper a few months out; IV in July and September already trades in the mid-30's, so it doesn't figure to take much of a Vega hit tonight. By and large, I'd sooner just ignore it altogether.

Disclaimer: The views represented on this blog are those of the individual author only, and do not necessarily represent the views of Schaeffer's Investment Research.


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