Ophir Gottlieb | Oct 27, 2013 02:21AM ET
Facebook, Inc. (FB) is engaged in building products to create utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about.
This is all about earnings and a phenomenon that appears in FB options that has some fascinating implications about sentiment (about FB and in my opinion, about the market). For those of you that want the headline up front, here you go: FB option skew bends up to OTM calls ahead of earnings.
For those of you that want the details or have no idea why that matters (or even what that is)... here we go.
Let's start easy, with the two-year FB Charts Tab below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).
1. The stock has been ripping, up nearly 200% from an annual low of $18.87.
2. FB spasmed off of the last earnings release, rising from $26.51 to $34.36 in one day, or a 30% rise. OK, keep hat in mind for later.
Next, let's turn to the two-year IV30™ chart in isolation, below.
Let's turn to the Skew tab as of Friday's close.
Notice how the OTM calls are priced higher than the OTM puts. yeah, that's right, there is reverse skew in FB options reflecting greater likelihood of an upside move than a downside move. So, with the stock exploding to new all-time highs, this $126 billion market cap social media company is showing upside potential over downside risk in this earnings release. Whoa...
And is this "normal?"
No, on two counts.
1. Option skew normally shows higher volatility in the OTM (out-of-the-money) puts than OTM calls. You can read about what option skew is and why it exists by clicking on the title below:
Understanding Option Skew -- What it is and Why it Exists
2. More specific to FB, just look at the option skew on 7-24-2013 (the day of the last earnings release)
We're talking about hugely elevated risk, a decided upside bias in the option market and a ripping stock. You know what I call that?... A bubble... And you know what happens to bubbles before they burst?... they rise.
Finally, let's turn to the Options Tab, below.
Disclosure: This is trade analysis, not a recommendation.
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