Volatility is high heading into Facebook’s (FB) third-quarter earnings report, and options traders are expecting a large move in FB. Currently, weekly October options are pricing in a potential post-earnings move of more than 7%, meaning Facebook stock could move as high as $86.76 or as low as $75.24 immediately following the company’s quarterly report.
The question for Facebook stock holders, however, is which direction?
For the record, Wall Street is expecting Facebook earnings of 40 cents per share, a figure that is up 38% from the same quarter last year. Revenue, meanwhile, is seen arriving at $3.12 billion, a 54% rise from year-ago levels.
Historically, Facebook earnings have topped the consensus estimate in the past five reporting periods, and analysts may be quietly keying off this strong fundamental track record. According to WhipserNumber.com, the whisper number for Facebook’s Q3 earnings arrives 4 cents higher than the consensus.
Clearly, FB has some high expectations to content with.
Speaking of high expectations, Wall Street’s longer-term outlook is quite bullish. In fact, data from Thomson/First Call reveals that Facebook stock has attracted 36 “buy” ratings, compared to just seven “holds” and no “sell” ratings. That said, there is room for price target increases, as the consensus 12-month target of $90 rests a mere 12.5% above FB’s close at $80.67 on Friday.
Options traders also are lining up on the bullish side of the coin. Facebook’s October/November put/call open interest ratio currently rests at 0.6, with call open interest of 232,606 contracts and put open interest of 140,723 contracts. Zeroing in on weekly October options (those set to expire at the end of this week), the put/call open interest ratio is negligibly higher at 0.61, with 117,451 calls vs. 72,314 puts open in the series.
These options bulls have focused their attention mostly on out-of-the-money strikes, with more than 10,000 contracts each open at the Oct $79, $80 and $87 strikes. On the put side, peak open interest numbers roughly 6,000 contracts at the in-the-money Oct $75 and $77 strikes.
Click to Enlarge Technically speaking, FB has come roaring back from its correction lows near $70. Facebook stock has even taken out former short-term resistance at $80, placing the shares in fresh all-time high territory. Immediate support lies near $80, but this region has yet to be tested.
Additional support should emerge in the $76 region, which is currently home to FB’s 10-, 20- and 50-day moving averages.
Options Trade on FB Stock
Traders looking to join the bullish FB bandwagon ahead of the company’s quarterly report might want to consider a Nov $80/$85 bull call spread.
This spread was last offered at $2.27, or $227 per pair of contracts. Breakeven lies at $82.27, while a maximum profit of $2.73, or $273 per pair of contracts, is possible if Facebook stock closes at or above $85 when November options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
