Schaeffer's Trading Floor Blog

Facebook Inc (FB): Did Volatility Expectations Come to Fruition?

Examining FB's IV vs. HV ahead of the mystery event

by 1/16/2013 7:53 AM
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In today's installment of Implied Volatility (IV) vs. Historical Volatility (HV), I bring you Facebook Inc (NASDAQ:FB).

Long before Facephones and Social Graphs and targeted ads, we had a simple dynamic in options markets in names with news pending. IV ticks up in anticipation of a potential gap on the news, while HV may or may not move.

FB went all Apple Inc. (NASDAQ:AAPL) on the world this week, with Mark Zuckerberg himself presiding over a "mystery" product launch. Unlike AAPL, though, the actual product to be launched remained unknown.

Sort of.

Here's a live blog from USA Today before the announcement:

9:45 a.m. PT: MENLO PARK, Calif. -- Reporters and analysts are assembling at Facebook's sparkling new headquarters here in anticipation of today's news -- the first major announcement from the social-networking giant in months.

Speculation is running high that it will center on search engine-related services in a move to challenge king-of-the-hill Google, which has leveraged its dominance there to control 57% of the overall mobile ad market. Facebook has 9%.

And just after:

10:20 a.m. PT: Search box will now give you ability to type in "My friends who like Star Wars and Harry Potter," to get a list of friends who like both.

10:28 a.m. PT: Graph Search can be used to recruit or find dates. The results show up as photos on left side of screen; on right, there's a summary.

Well, okay then. If you had a parlay on "Zuckerberg wears hoodie/FB introduces graph search," you won big.

I'm not much of a Facebook user, so I have no idea if this enhances my non-experience, but I strongly doubt it. But it sounds like analysts like the revenue potential here, though it probably didn't quite live up to the hype of the meeting to begin with.

But we're interested in the options here, anyway. Here's a graph of 20-day HV vs. 30-day IV (essentially, the VIX of Facebook) covering the past six months, courtesy of the folks at

FB 20-day HV vs. 30-Day IV

And as you can see, IV and HV have moved in opposite directions. IV has ticked up steadily over the past few weeks, from near 50 to the mid-60's. Meanwhile, HV dipped from near 50 to the low- and mid-40's.

Trading opportunity there? Well, the options were pricing in a move of about 2% to 3% (based on the time spreads, and similar to the way you would analyze earnings expectations). And that's about what happened. And remember, FB still has its earnings report due out in a couple of weeks, so the "bid up" will likely persist. HV will trickle up a bit thanks to Tuesday's relatively large range, but that's about the only excitement.

Well, unless Graph Search floats your boat.

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

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