Shares of Facebook Inc (NASDAQ:FB) closed at new all-time highs yesterday following an upbeat earnings report. While initially Facebook stock was down after hours following the earnings news, shares rebounded during the regular trading session to close up over 3%. While all may seem good for a continuation of the rally, if history is any guide then FB stock is likely due to struggle in the near-term.
No question earnings were a definite beat (as InvestorPlace writer Karl Utermohlen noted) , although both Daily Average Users (DAU) and Monthly Average Users (MAU) were a less compelling metric. It is interesting to note that the magnitude of the beat was by far the smallest over the past four quarters. This quarter’s earnings beat was 12.24% compared to previous beats of 24.22%, 16.81% and 18.18%.
Look for more of the same simply because higher earnings make for a more difficult comparable beat from a percentage standpoint.
More interesting as a trader is the stock reaction following the last three earnings reports. As seen in the chart, FB stock rallied hard immediately following the previous earnings releases but then failed to move higher.
Each of these past three reports marked a significant short-term top in Facebook stock over the subsequent month. Also interesting to note that the post-earnings pullback reverted back to the trend line in each instance. I expect Facebook to follow suit again this quarter with FB stock heading lower from current levels.
While the uptrend most assuredly still remains in place for Facebook, the stock is now positioned at an extreme to the trend line. Prior instances when FB stock traded at similar extremes proved to be a warning sign that the move was overdone and a subsequent pullback towards the trend line was in the offing.
This is another sign that the euphoria may be getting out of hand.
Implied volatility (IV) had the usual post earnings vol crush (especially since FB stock rallied), so option prices are cheap. This sets up ideally for a cheap short-term put play to position for a pullback in Facebook.
FB Stock Trade Idea
Buy the FB Feb $190 puts at $2.25.
Intrinsic break even on the trade is $187.75, which equates to a 2.76% drop from the closing price of $193.09. Given the magnitude of the recent up leg and the fact that the trend line sits near the $176 level, I think the trade makes sense from a probabilistic standpoint.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
