{"id":45837,"date":"2018-10-29T23:09:33","date_gmt":"2018-10-30T06:09:33","guid":{"rendered":"https:\/\/drduru.com\/onetwentytwo\/?p=45837"},"modified":"2018-10-29T23:09:33","modified_gmt":"2018-10-30T06:09:33","slug":"bullish-pre-earnings-facebook-trade","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2018\/10\/29\/bullish-pre-earnings-facebook-trade\/","title":{"rendered":"In the Middle Of A Calamity, A Bullish Pre-Earnings Facebook Trade"},"content":{"rendered":"

When Facebook (FB) lost 19.0% after reporting earnings on July 25th, the stock’s $120B loss was reportedly the largest one-day loss in absolute terms in stock market history<\/a>. That trauma was of course epic in scale, but it was well aligned with the startling post-earnings run-up that followed the April 25th earnings report. In fact, the July one-day loss did not even finish erasing the entire run-up going into July earnings. The gap up did not finish closing until September. The market started its response to April earnings with a 9.1% gain, and the buyers were off to the races after that. The stock nearly went parabolic along its upper Bollinger Band (BB) ahead of the July earnings.<\/p>\n


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\"Facebook<\/a>
Facebook (FB) fell another 2.3% to close at an 18-month low. The collapse makes the last run-up to all-time highs almost look like a burst bubble.<\/figcaption><\/figure>
\nSource: FreeStockCharts.com<\/a><\/strong>
\n<\/center><\/p>\n

Combine the July trauma with the current calamity in the general stock market<\/a> and the market offers up some very expensive options in Facebook ahead of its October 30th earnings call after hours. Based on Monday’s closing prices, options players expect about a 13-point move, up or down, by the end of this week. Weekly calls and puts expiring this Friday at the $142 strike each cost about $6.50. Add the two together to get the approximate expected move of $13. That move equates to a +\/-9% post-earnings burst. <\/p>\n

Based on Facebook’s earnings history, a +\/-9% move is a bit on the extreme side. Out of Facebook’s 25 earnings reports, only 5 have delivered 1-day post-earnings gains above 9% and just 2 have delivered post-earnings gains below -9%. This extreme is on a distribution that is slightly skewed positive with an average gain of 2.8% and a median gain of 2.3%. Around half, 14 to be exact, of FB earnings reports have delivered 1-day gains. <\/p>\n


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\"The<\/a>
The majority of Facebook’s 1-day price earnings changes fall in the range of -5% to 5%.<\/figcaption><\/figure>
\nSource: Prices from Yahoo Finance<\/a>. Earnings dates from briefing.com.<\/strong>
\n<\/center><\/p>\n

With options on the pricey side, a good pre-earnings play should include selling some premium back to the market. With the market sell-off at historic extremes on a relative basis<\/a> and Facebook already down 15.8% for the month of October, I am inclined to bet on a positive post-earnings response. Given these conclusions, I took interest in CNBC’s OptionsAction show last Friday which proposed a calendar call spread as a pre-earnings play. <\/p>\n

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Facebook is having its worst year ever, but could it be due for a bounce? @Michael_Khouw<\/a> and @RiskReversal<\/a> weigh in. $FB<\/a> pic.twitter.com\/SV7Wc7TaYu<\/a><\/p>\n

— Options Action (@OptionsAction) October 26, 2018<\/a><\/p><\/blockquote>\n