Facebook’s Volatility Has Fallen Into the Basement

by Tyler Craig | May 20, 2013 11:16 am

In a raging bull run where down days are rarer than dodo birds, shareholders across the globe expect their beloved stocks to participate in the market melt-up. What’s even better than matching the overall market’s rise, of course, is beating it. If a stock can best the S&P 500’s year-to-date 17% gain, it joins the coveted group of market leaders.

Sadly, some stocks have not only been left out of the limelight, but ousted from the party altogether, left to wander aimlessly in the land of underperformance. Many of these disappointments haven’t even been able to eke out a gain for the year.

One of the current high-profile members among these outcasts is Facebook (FB[1]), which is down 3% this year.

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As shown in the accompanying chart, relative weakness has plagued FB throughout the entirety of 2013[2] — and, it seems, the majority of its public life.

While there isn’t much to excite investors from a price perspective, things do get a bit more interesting when we look at FB options.

When options were first listed on the social media titan in late-May 2012, the implied volatility started around 60%. Despite an erratic first few months, IV has consistently dropped over time as FB’s stock behavior has matured. Following the recent earnings announcement, IV has now fallen to new all-time lows at 30%.

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With IV already having dropped so far from its pre-earnings heights and Facebook’s stock still exhibiting 32% historical volatility (not shown), options on FB appear cheap. So if you’ve been considering selling options in some fashion — be it a covered call, naked put, or otherwise — recognize you’re not going to be compensated as well as perhaps you have been in the past.

On the flipside, if you’ve been considering buying options, they are now cheaper from a volatility perspective than at any time since its IPO.

If you’re looking to place a directional bet to exploit Facebook’s next move, consider keeping it simple and buying a call or put outright. Bulls could buy the July 25 call for $1.74, Bears could buy the July 26 put for $1.40.

The max risk in both positions is limited to the initial debit paid, while the max reward is unlimited.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  2. relative weakness has plagued FB throughout the entirety of 2013: https://investorplace.com/2013/05/2-technically-disintegrating-stocks-to-avoid-or-short/

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