All eyes are turning to Facebook Inc (NASDAQ:FB) tonight. The sultan of social media steps up to the earnings plate in an attempt to razzle dazzle spectators. As if they weren’t already entertained — FB stock is up 44% year-to-date.
The pivotal question is whether what is bound to be stellar earnings is already baked into the cake. Will shareholders use tonight’s release as an excuse to ring the register? For the record, analysts are looking for $1.13 in earnings (+16%) on revenues of $9.2 billion (+43%).
Alphabet Inc (NASDAQ:GOOGL) serves as a perfect example of the old “buy the rumor, sell the news” phenomenon. In the three weeks before its announcement, the internet titan rallied 10%. And despite a solid report, GOOGL stock is down 3.5% post-earnings.
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On the technical front, there’s nothing not to like about Facebook stock here. She’s perched at all-time highs atop all major moving averages with nary a whimper of distribution over the past month.
To gauge expectations for just how much Facebook is expected to move, we can analyze the options board. The value of the weekly straddle (which expires in two days) is currently $7.30. With FB sitting at $165 that means we’re looking at a 4.4% move by the weekend. So despite the recent rise in implied volatility, the market isn’t expecting anything too crazy here.
Collar Your Gains on FB Stock
Facebook shareholders reticent to ring the register ahead of tonight’s fireworks, but interested in acquiring some protection, should consider collaring their stock position. An options collar consists of selling a covered call on your stock to help finance the purchase of a put option.
For example, with FB sitting at $165, you could sell the 28 Jul $170 call option for $1.65 (that’s the covered call) and buy the 28 Jul $160 put option for $1.55 (that’s the put protection). You can enter the short call/long put combo for a 10-cent credit. That means you don’t have to commit any more capital to your Facebook position. You actually get paid to enter the position!
The big benefit is you now have the right to sell FB stock at $160 even if it craters after earnings. That limits your downside to $5. The drawback is you are now obligated to sell your stock at $170, so your potential upside is limited to $5.
Given Facebook’s enormous gains this year, I think this is a fair trade-off for those looking to shrink the number of potential outcomes into tonight’s earnings release.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
