Post-Mortem on the Facebook Fade
Facebook is (FB) is dominating the status updates for many financial journalists this morning. Last night did bring about a sharp reversal in the after-hours, after the stock initially surged to $57 within five minutes of releasing results. There were a few key notes from the conference call which are being blamed for the selloff, including the concern about teens leaving Facebook, which really shouldn't be a shock, and the lack of any mention of a catalyst going forward or even an expansion in ad space. Still, there are other things to consider regarding the fade.
The premiums on Facebook were fairly big. They were big enough that I knew many traders who were looking to sell premium either against the stock or just as a trade. My trade was basically structured in that manner, and I can say I was a bit concerned when I saw Facebook spike higher. I started to calculate what my losses would be as the stock was trading at $56 or $57. One big difference for me was that I sold premium and also limited my losses. I did not have any naked call or put positions, but rather different spread plays, so my loss was limited to the distance between the short position and long position, less any net credit I was paid. However, if I were simply short calls, like some traders surely were, ghosts of earnings past probably came into play.
Remember last quarter when Facebook gapped higher, then simply kept running? If you were short calls then, there is a chance you are no longer in the business of trading. Traders remember those things, so when Facebook gapped to $53, then continued to run to $57 in quick fashion, there were likely traders with short call positions who panicked and wanted to limit their loss potential, so they scrambled to buy the stock. If it ran 25% last quarter, then why couldn't it run to $60 or more this time around? So these traders start to buy, then get faced with the long call holders who begin to short the stock to lock in gains. Furthermore, you have straddle sellers who were fighting to keep the stock from going above the price of the weekly and monthly $49 straddle price, which is precisely what happened.
Suddenly the stock begins to fade, and the short call seller who was an after-hours stock buyer begins to panic even further when the share price starts to fall. The lucky ones bailed on their stock early, but the ones who didn't start to see what they thought to be a "limited" loss begin to grow even more. For instance, if I sold the November 1 $52 call at $1.60, then bought the stock at $56 after hours, I have a loss of $2.40. But once the stock falls under $52, I am now losing even more. At $50, all the sudden I would find myself down $4.40, when I thought I had limited myself to a loss of $2.40.
I believe this had a profound impact on the after-hours action last night and even into this morning, as the reverse can happen for those who are short puts who see the stock begin to rise after falling through their strike price if they also locked in gains.
As for my trade posted yesterday, my concern turned to relief as the stock faded back inside the $48-$50 area I really wanted to see. The trade paid me a net credit this morning and can now be sold for another $0.10 to $0.20 credit, resulting in a profit of $4.00 to $4.20. The best I've seen this has been a value of $0.70, while the lowest I've seen it is -$1.65, both of which are far better than the -$4.00 the position I started at yesterday. In other words, the trade has been profitable since the open, and I've closed two-thirds of the position already.
On the last third, I spent $0.78 total to move my long weekly $54 calls to long weekly $52 calls, which lowers my overall net credit on the remaining portion to $3.22. My max loss should now be eliminated, and my worst case should be a gain of $0.25 to $0.50 on the last part of the trade. I will say the stock looks better and is setting up a long here.
At the time of publication, Collins was long FB Nov 22 iron condors and short FB Nov 1 iron condors.