Facebook Inc (NASDAQ:FB) is the best performing stock on the Standard & Poor’s 500 Index. Generally, such a fact forces investors to trade options, especially before the announcement of the earnings. However, options trading patterns of the social networker has been “largely quiescent,” says a report from Barrons by Steven M Sears.
Facebook strong ahead of earnings
As per the latest comScore data cited by JPMorgan research, time spent on internet is at all-time high for Facebook with 18% for desktops and 20% for mobile devices, in June. Such robust engagement data is quite handy especially before the Wednesday’s second-quarter earnings report.
Based on the comScore data, Doug Anmuth of JP Morgan reiterated its Outperform rating on Facebook with a price target of $80. Previously, five of the 39 analysts covering the stock have raised their expectations from Facebook, which is expected to post earnings of 32 cents a share on revenue of $2.8 billion.
Backed by such catalysts, investors have pushed the stock too much that it has become the S&P 500?s best-performing stock, gaining almost 170% in last twelve months, according to Quartz.
How to gain from options trade
As per the Goldman Sachs’ volatility database, Facebook’s options are priced expecting the stock to move 11% following the earnings compared to 9% witnessed in the past eight earnings reports. To initiate a position expecting Facebook to gain after earnings, investors can go for December $65 Call available at $9 and sell the December $62.50 put for $3.50, according to Sears.
Options expiring in three-months are priced at the bottom range of the previous year’s implied volatility. “This suggests Facebook’s options are trading without a fear or greed premium, enabling investors to buy calls and puts without paying top dollar,” says Sears. Therefore, if the company’s second-quarter numbers meet or beat the consensus estimate, then the options price should gain.
Initiating such a position will cost $5.50. The long call allows investors to position if the shares go up while the short call allows investors to buy the stock if its fells below $62.50. However, if the stock trades at JPMorgan’s price target of $80 and the put expire, the net gain in such a scenario will be $9.50.