How one trader plans to make millions 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.


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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