Wednesday, September 23rd, 2020

Facebook Long Straddle

 

A common option trading strategy is the long straddle.

A long straddle is buying both a call and a put on the same stock with the same expiration date. In a long straddle options strategy the worst a trader can do is lose the cost the premiums paid for the call and the if the stock does not change price. However, this options trading strategy has potentially unlimited potential if the stock price changes significantly.

This is a useful approach in a volatile market in which a stock is likely to rise or fall but the trader is not sure which. Our interest in this strategy comes from watching what happened when Facebook announced its quarterly results and the price fell.

Facebook Long Straddle

Many options traders were sure that Facebook was going to announce a substantial increase in earnings after trading hours on July 28, 2015. The Wall Street Journal reported that Facebook options indicated a huge earnings move.

Options traders are betting that Facebook Inc.FB -3.00%’s second-quarter results will spark the biggest move after earnings in a year and a half.

The social network reports earnings after the bell on Wednesday. Facebook shares have surged 22% in 2015 so far, and have gained 29% over the last 12 months.

The market is pricing in a swing of 8.5% through the end of the week, based on the price of an options strategy called a straddle, according to Trade Alert. A straddle involves buying a call option and a put option at the same price and for the same period of time, allowing the investor to bet on the size of the move rather than the direction.

A move of 8.5% would be the largest swing after earnings since January 2014, when shares jumped 14%.

If Facebook had reported a big earnings increase and gone up in price this would have been a good strategy. However, earnings were not enough of what investors wanted and the stock opened lower and kept falling the morning of July 30. A better approach would have been along straddle which gives the trader a profit if the stock goes up or down.

You Cannot Satisfy Everyone

Poor Facebook. The company makes more money and the stock price falls. CNBC reports on Facebook earnings.

Facebook reported quarterly results Wednesday that topped analyst estimates on nearly every metric.

The company said its adjusted second-quarter earnings came in at 50 cents per share on $4.04 billion in revenue. Wall Street analysts forecast Facebook would deliver earnings of 47 cents per share on $3.99 billion in revenue, according to a consensus estimate from Thomson Reuters.

“The quarter was a great quarter almost any way you look at it,” David Wehner, Facebook’s CFO, told CNBC after the earnings came out.

Despite the beat, Facebook shares fell about 5 percent in after-hours trading soon after the announcement [.]

The point of using a long straddle on companies like Facebook is that the trader locks in the opportunity for a profit whether the stock goes up or down. The risk is limited to the price of the two options contracts.

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