Facebook Inc (FB) Earnings: Interesting Option Idea From Stifel

Facebook Inc (NASDAQ:FB) reports earnings after the close today. Analysts expect the company to  report earnings per share of $0.11. This will be the second time the company reports as a public entity. We warned readers about the stock before the IPO. Shares have become slightly cheaper, due to the large drop in price since the IPO. Facebook Inc (NASDAQ:FB) shares are currently trading at $19.44 a share.

Facebook Inc (FB) Earnings: Interesting Option Idea From Stifel

Stifel Nicholas options analysts, Brian Donlin, is out with an extremely interesting report today, regarding Facebook Inc (NASDAQ:FB) options. The report notes, on October 15, 2012, Stifel’s Internet Service analyst, Jordan Rohan, published his sector preview note,”Large Cap Internet Earnings Preview: EBAY, GOOG, YHOO, AMZN, FB .” According to Bloomberg, Facebook Inc (NASDAQ:FB) (FB: Hold, $19.25) listed options are pricing a 12.63% move on earnings, when the company reports after the market close on 10/23. Because this will only be the company’s second earnings release since going public, coupled with all the uncertainty around mobile growth and declining desktop trends, the Stifel Option team thinks that November options present an attractive buying opportunity to capture potential stock movement from the earnings release and potential repositioning by investors/traders.

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There will be three more unlocking periods (October 29, November 14, and December 14) during which employees will be able to sell shares, which is an important part to their thesis.

We summarize some of Brian Donlin’s ideas below.

However, when combined with the fact that all syndicate members will be in a quiet research period from October 29 through December 28, due to the share unlocking, you could see an intense amount of information flow in a short amount of time.

This information will have to get absorbed in the market place without a lot of potential follow up commentary. This could create two situations. The first is there could be significant short-term gyrations in the stock as the earnings report and a barrage of sell side notes hits all at once before the quiet period. Second, once investors are in the quiet period, without the ability for follow up, trading ranges could become extended, coupled with sharp reversals as the stock activity could be largely sentiment driven.

This type of trading activity is one of reasons why they like owning the November options, instead of just trying to own weekly options. November options will also capture what they think is an under-priced earnings move. Brian notes that implied volume in November, at 70, will screen as elevated to some.

However, he look at the implied earnings move as being low, and feels the actual move will offset the decline in implied volume. He also thinks implied volume could reset in the low 50s, and he finds owning 50 volume, in what the Option team sees as the near-term trading environment for the stock, to be attractive.

Disclosure: No position