Mark Sebastian on facebook Options

Site Administrator | May 30, 2012

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Special thanks to Mark Sebastian of on the following guest post.  Mark will be joining us for a live event this Thursday at 4:30 pm eastern and you can register HERE.  

I promise this will be one of the only Facebook options posts I put up over the next few weeks.  However, I wanted to make sure that I pointed out a few interesting tidbits about options on facebook that, maybe, the average retail trader might not have noticed.  Stuff everyone should know before reading the rest of this piece:

Facebook options started at an implied volatility below 60% this morning, while the realized volatility has been closer to 100% in its first week of trading.  What does that say about facebook?  Not much.  The stock is so new, and has been beaten down on its open, that we really don’t know what the volatility will be.  My guess though,  the stock is going to slow down its free fall, and the volatility will settle in closer to GOOG levels (around 30%)  than to ZNGA levels (near 85%).

The stock is also hard to borrow right now.  While that was likely more of a problem with the stock at 33 than 29, as long as the borrow is hard, the stock will have problems.  Keep an eye on that.  I think the HTB tag goes away around 26-28 dollars a share as the easy money leaves.

In terms of skew:

Livevol (r)

As one might expect, the skew is a standard investment skew, with puts seemingly expensive due to the rate of decline.  On the other hand, calls seems pretty flat (this could set up well for a bullish fly if/when the stock gets a bounce).  It also sets up well for front spreads.

Finally, and most interesting is the term structure.

Livevol (r)

Notice that June is super bid while July is much cheaper.  This implies that there is high demand for gamma in the near term.  August is over July as well, as that is an earnings month.  This structure, more than anything I think, sets up for great term trades.  While the market is clamoring for short time spreads (based on the term structure, traders want to own June gamma and be short July vol against it), I think there could be a great short term either ATM or slightly OTM calendar play (possibly some sort of double diagonal could even work).

When they first start bringing in the June vol (which they will do), expect the June to get punched in the face while the July holds up at first.  There could be about 5 quick points of vol to be collected in the June contract before July starts to move.  I am expecting that type of violent sell off in June.  The spread should push to even before we see any July reaction.  Traders should be able to squeeze at least a .10-.15 out of June on that move, up to June trading at a 2% discount to July.  At that point, the short time spread will really start to work.  Do not be late for that part and stay in this spread too long.

Facebook options traded about 270,000 contracts today,  That is about 4 times the stock volume in terms of notional shares.  As with AAPL, I think the FB options could really wag the dog and push the stock around.  Keep a sharp eye on those vols.  For now, with FB moving at 110%, traders want that gamma, but that want for gamma can dry up fast.

Be sure to join Mark for "Three Trade Ideas for June"  REGISTER HERE


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Risk Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial financial risk. Views of guest commentators do not represent those of Article intended for educational purposes only and not meant in anyway as a solicitation to buy or sell certain securities. Please consult your personal financial adviser before using this information for your own trading purposes.