Why It Might Be Time to Jump Into Facebook
On Thursday, Facebook held a press conference to show how they have integrated Facebook into the home screen of a new HTC phone. This could be a good opportunity for the social network giant to increase its mobile advertising presence.
However, one option trader made a bet Thursday morning that the announcement will not move the stock significantly higher in the coming month. The trader sold 4,000 27-strike calls expiring on 4/26 for $0.49 each. This trade will be profitable if FB is below $27.49 at expiration, but it theoretically faces potentially unlimited losses above that level.
(Read More: Facebook Wants to Be Your Smartphone's Home Screen)
This trade was most likely done as a hedge against a stock position, in order to reduce the trader's downside risk if Thursday's event failed to impress. This trade was also likely done to take advantage of elevated implied volatility in these options ahead of the announcement.
Since the announcement, the implied volatility in these options has declined by 1.5 points, which has helped to offset the effect of the calls moving into the money. In other words, while the stock did move against this options position, the trader was helped by the fact that options as a whole lost value. If this trade was done against stock, then it is a winner: The calls are now worth $0.80, but the stock is up by $0.90, which means that the entire covered call position is up $0.60 on the day.
Now we are seeing traders more aggressively sell puts and buy calls, which is a bullish sign for Facebook shares, and could be an indication that this is a good time to lift hedges and get more upside exposure to the stock. Facebook has some support under it at the $25 level, which coincides with the 200-day moving average, and helps to skew the risk/reward in favor of a long position so long as the stock holds here.
—Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."