Near-Extreme Optimism Priced Into Facebook Stock Ahead Earnings

Facebook Inc (NASDAQ:FB) and Google parent Alphabet Inc (NASDAQ:GOOGL) are used to battling in the war of online advertising, but this week the companies are also taking each other on in the earnings booth. Alphabet reported an earnings beat last night, but cost concerns disappointed the Street, and GOOGL stock is paying the price today. Now, with Facebook earnings due up after the close on Wednesday, optimism seems sky-high on the social media stock. 

Looking to the options pits, there's been an overwhelming preference for call options. Nine of FB's 10 largest open interest positions are all calls, and total call open interest of 1.5 million contracts sits in the 98th annual percentile, after topping out at a 52-week peak of 1.7 million contracts last Friday.

Zeroing in on the last two weeks in particular, call buying has been extremely popular across the major exchanges. The stock's 10-day call/put volume ratio of 2.57 across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is in the 100th annual percentile. 

The September 175, 180, and 200 calls all saw some of the largest increases in open interest during this time period, thanks to a three-tiered spread that crossed back on July 18 -- targeting a move to $200. The September 160 also saw a notable rise in open interest, as it appears one trader last Wednesday rolled up his September 150 calls, expecting even more upside from Facebook stock in the weeks ahead. 

The bullish bias extends outside the options arena. Analysts covering Facebook remain firmly behind the shares, with 24 of 26 rating the stock a "buy" or "strong buy." Plus, short sellers are nowhere to be found. In fact, short interest has decreased by more than 10% since mid-May, with less than 1% of the stock's float now controlled by these bears. 

This optimism seems warranted, though, with FB stock is up 43% year-to-date at $165.08, and hitting a record high of $166.17 yesterday. However, following the stock's  sharp run higher in recent weeks, its 14-day Relative Strength Index (RSI) closed last night at 75 -- in overbought territory.

Meanwhile, Facebook stock has actually moved lower in the session after earnings for three straight quarters. Throw in Google's disappointing results and an argument could be made for pumping the brakes on FB ahead of earnings. Then again, it's not hard to imagine the tech titan defying logic with a blowout quarter, like it did in January 2016 -- when an earnings beat sent FB stock up 15.5% in the subsequent trading session.