Behind the massive bet on Facebook
Facebook options have been very active Wednesday, as traders made predictions about the company's earnings report, which will be released after the close. And there are several reasons that traders might want to get bullish on the stock.
One trader has taken a bullish position on the stock, purchasing 2,444 of the Aug. 2 weekly 27-strike calls for 84 cents each. This trade cost the trader $205,000, and that is the maximum loss on the trade. In order for this trade to make money, Facebook shares will need to trade above $27.84—so this trader is expecting to see a 5.7 percent increase within nine days.
Analysts expect to see Facebook earn 14 cents per share, and report revenue of $1.62 billion. But while earnings and revenue will be important, other statistics could play a larger role in helping analysts determine whether the quarter was a boom or a bust.
The mobile ad revenue and the mobile user growth rate are two very important numbers because of the growing market for smartphones. Another area in which Facebook has room for growth is in foreign markets; two-thirds of Americans have an account, while only 50 percent of those in Europe and 25 percent in Asia use Facebook.
The company has also announced plans to roll out advertising content in the form of videos, which could generate more ad revenue and potentially appeal to Facebook users. Analysts at Jefferies have called the video advertising plan a potential "$1 billion industry."
Facebook shares bottomed last September at $17.55, but two large breakouts in October and November which were spurred by heavy trading—both times, there was more than 200 million shares exchanging hands within a single day—helped take the stock to a 52-week high of $32.51.
One of the reasons FB broke out in October was because of a very positive earnings report that showed revenue growth from the mobile segment, indicating that more positive news from mobile in Wednesday's earnings could cause a new breakout.
A breakout point back in November for Facebook was $23, and that level has now become support. But while the shares managed to bounce off of this price level in June, there appears to be strong resistance at $29.
The implied volatility for the earnings is 12.4 percent, and the average implied volatility for the past eight earnings has been only 9.3 percent, indicating that investors are expecting to see a large move.
A 12.4 percent bullish spike would put FB at about $29.50, which is above our resistance level—so for that reason, we expect the actual volatility to be slightly less than the current implied volatility.
There has been a lot of call buying in Facebook, as investors predict positive news from the company. Because of this, the trader's purchase of the August weekly 27-strike calls appears to be a good trade, because it allows them to profit off of a post-earnings rally, while maintaining a breakeven point that is below the resistance level at $29.
Disclosures: Stutland is long Facebook call spread.