Volatility Expectations Ramp Up on Facebook Stock Ahead of Earnings

Facebook will report third-quarter earnings after tomorrow's close

Oct 31, 2017 at 3:43 PM
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Call volume is running at an accelerated clip on Facebook Inc (NASDAQ:FB) ahead of the company's third-quarter earnings report, due out after tomorrow's close. At last check, 156,315 call options had traded -- 1.2 times the expected intraday amount, and volume pacing in the 81st annual percentile. And, with FB fresh off a new record high of $180.80, options traders are paying up to bet on higher highs for the social media stock.

Most active so far are the weekly 11/3 180-strike and November 180 calls, where close to 20,000 contracts have collectively changed hands. It looks like options traders could be purchasing new positions at both strikes, meaning they're betting on Facebook shares to extend their surge over $180 during the next few weeks.

This accelerated call activity is nothing new for FB options traders. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 232,868 calls in the past two weeks, compared to 95,190 puts. The resultant call/put volume ratio of 2.45 ranks higher than 96% of all comparable readings taken in the past year, suggesting calls have been bought to open over puts at a faster-than-usual clip.

Those currently buying short-term contracts are willing to pay for inflated volatility premiums. Ahead of earnings, FB's Schaeffer's Volatility Index (SVI) of 31% ranks in the 65th annual percentile, while its 30-day at-the-money implied volatility of 30.3% rests higher than 95% of all comparable readings taken in the past year.

That said, Facebook's 30-day at-the-money implied volatility skew of 5.7% ranks lower than 91% of all comparable readings taken in the past year, indicating put options are pricing in lower volatility expectations, compared to calls. In other words, those long Facebook stock could pick up relatively cheap options hedges.

Looking at the charts, today's upside is just more of the same for FB shares. At last check, the stock was trading at $179.99 -- up 56.4% on the year. Off the charts, Facebook will continue its testimony in front of Congress tomorrow, joining fellow tech titans Alphabet (GOOGL) and Twitter (TWTR) in hearings on alleged interference by Russia in the 2016 U.S. presidential election.


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