Call Options Explode as Facebook Inc (FB) Prepares to Report Earnings

Facebook Inc (FB) is getting punished ahead of tonight's earnings report

by Alex Eppstein

Published on Apr 27, 2016 at 11:16 AM
Updated on Apr 27, 2016 at 11:21 AM

It's been a rough day for social media stocks, as evidenced by Twitter Inc's (NYSE:TWTR) earnings implosion. Among the stocks succumbing to sector headwinds is Facebook Inc (NASDAQ:FB) -- down 1.3% at $107.38 ahead of the social media firm's own earnings report tonight. Meanwhile, FB options are running at an accelerated rate.

By the numbers, 217,000 call options are on the tape -- more than doubling the expected intraday amount. Among the most active FB strikes are the out-of-the-money May 115 and June 120 calls, where buy- and sell-to-open activity may be transpiring. If this is the case, the call buyers foresee the stock bouncing back sharply and toppling the strikes by the respective expiration dates -- May 20 and June 17. On the flip side, the call sellers are counting on the strikes acting as near-term ceilings. 

This activity only echoes what we've seen in recent months across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Since the start of February, for example, roughly 7,800 contracts have been bought to open at the June 120 call, while nearly 4,200 have been sold to open. In fact, FB's 120 strike is home to peak call open interest in the back-month June series, with more than 30,100 contracts in residence.

As we mentioned yesterday, premium on short-term Facebook options is relatively expensive right now -- which is understandable, given tonight's earnings report. Historically speaking, the stock tends to make sharp moves after these events. Looking back eight quarters, FB has averaged a one-day post-earnings swing of 4.9%, in either direction -- including a 15.5% gain in late January. This time around, the options market is pricing in a single-session move of 12.0%.

As previously mentioned, Facebook Inc (NASDAQ:FB) is struggling today. In fact, the stock's year-to-date lead has now narrowed to 2.6% -- though this is roughly in line with the performance of the broader S&P 500 Index (SPX). Looking more closely, option bulls are likely counting on FB's 120-day moving average to serve as support, just as it did in early February.

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