Trading Nation

How one trader plans to make millions on Facebook

The big trade on Facebook

With Facebook earnings around the corner, one big trader has an intriguing strategy for playing the tech giant.

In one of Monday's biggest options transactions, a trader appears to have sold 17,000 Facebook 100-strike puts expiring on April 29 for $1 each (in round numbers).

This could lead to a few positive turns of events. First of all, the trader took in $1.7 million for selling the puts. If Facebook shares manage to close above $100 at month's end, the seller will get to keep that entire amount. That's about 9 percent below Monday's closing price.

If, on the other hand, Facebook closes the month below $100, the trader will be forced to buy the stock for that price, even if it is trading well below that level. At the $99 level, once the extra amount the trader will have to pay for the stock dominates the $1 options premium, the trade will result in a loss.

However, this is where the second potential positive outcome comes in.

If Facebook falls sharply after its scheduled April 27 earnings report, and then rebounds nicely off of its lows, the trader will sandwich one negative event — being forced to buy the stock at above-market prices — between two positive events — receiving a premium for selling the put, and riding the stock higher from the $100 level.

This is why selling puts is sometimes described as being "paid to wait." That is, if this trader is 100 percent certain that he or she would be willing to pay $100 for Facebook shares at the end of April, the trader can go ahead and sell that put, thereby monetizing that willingness.

"It's a very shrewd trade," commented Dennis Davitt, an options strategist at Harvest Volatility Management, in a Monday "Trading Nation" segment.

Davitt points out that the volatility implied by the options price is three times higher than the volatility the stock has realized recently, which could be a sign that the option is too expensive — and hence ripe for the selling.

On the other hand, if Facebook falls as dramatically off of Q1 earnings as it rose off of its Q4 report, this trader could be out a good chunk of change. Each dollar Facebook shares drop below $99 will theoretically cost the trader $1.7 million.