• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Technology

3 Ways to Play Facebook Ahead of Wednesday's Earnings

Here are some options strategies for this FANG name into tomorrow's report.
By STEPHEN GUILFOYLE
Jul 24, 2018 | 08:04 AM EDT
Stocks quotes in this article: NFLX, MMM, CNC, LLY, HOG, IPG, JBLU, LMT, DGX, SHW, UTX, VZ, T, CB, SYK, TXN, AMZN, GOOGL, FB, AAPL, NVDA

Better Lucky Than Good

As many traders do, I normally play the FANG names around their individual earnings. Now, tolerance for risk becomes an issue as these events unfold. Obviously, one can come away with a significantly changed P/L for the day or week almost instantly upon release. I had played Netflix (NFLX) from the short side back on July 16. That decision was made just a few seconds before the closing bell on that day -- and within eight minutes, my target had been hit and a profit of $40.25 could be booked. Seconds prior to the closing bell is when I typically make these earnings-related decisions, based on the way the tape moves. (This is for trading, not investing.) If it smells right, I play the game. If not, I hold my fire. Could have made more. So what? If that bothers anyone, they probably are not built for this sport.

Now, I have been long both Alphabet (GOOGL) , and Amazon (AMZN) for a good while now. Dissatisfied with my gains in GOOGL, I had added to my equity stake in May after the momentum built in late April failed to hold. My intention going into last night had honestly been to take some of the equity position off and transfer that risk to the options side. Funny thing happened at 3:59 p.m. and change. I lost my Internet connection. Poof. I was going to have to go into this event wearing my big boy pants. Lucky. There is now a zero percent chance that my position hits the light of day without experiencing a reduction in size. Better than good.

For fans of the FANGs, Facebook (FB) reports tomorrow night, and my favorite -- Amazon (AMZN)  -- reports Thursday night. Do I play these two? Can't do worse than two for four this season. I am already wearing AMZN. I am not a fan of Facebook, from the point of view of a consumer. I mean, I used to like Facebook. Where else could I remain pals with people that I have not seen in person since high school? Unfortunately, those people who used to be able to converse on things like sports and music are only able to post political memes now. As if anyone will be magically convinced to change their political views.

Standout

You thought that the banks led the way on Monday? The CCAR effect? Call it the BOJ shuffle. Call it what you want, any whiff of rising yields and poof! The financials love it. The 2-year/10-year Treasury spread? Now spans more than 33 basis points. Don't look now, but the 3-month/30-year curve is back to well over a full percentage point. Ahh, good times. And by 4 p.m., the star of the day was Alphabet.

Alphabet reported second-quarter digits that beat expectations for EPS (crushed it), and revenue (+25.6% y/y). Best of all, the traditional Google business, the business of paid clicks, really took off. That driving force printed at +58% year on year, and +15% quarter on quarter. Huzzah. A $5 billion European Union fine over anti-trust issues you say? The firm still beat expectations with or without.

Operating margins, a major concern prior to this release, actually improved ex-the fine, as total acquisition costs printed below projections -- a major and positive reversal in trend. By the way, Google Other, which is where the firm lumps the cloud business in together with several other business lines, showed year-over-year growth of 36%. Traders of this name might want to stay cognizant of the fact that the firm will hold its next "Google Cloud Next" conference next week. That's a lot of nexts.

This morning, Alphabet tips the firm's proverbial cap to the crowd. As that name steps back into the dugout, Facebook takes a last couple of practice swings before knocking the doughnut off of the firm's bat.

Facebook

Monthly Active Users (MAUs), Average revenue per user, advertising across platforms, average ad price. Finally, revenue. Facebook knocked it out of the park last quarter -- posting revenue that grew 49% year over year as advertising sales increased by 50% and operating margins expanded to 46%. Asia has been growing the fastest of all of Facebook's regions.

In the wake of the EU's implementation of General Data Protection Regulation (GDPR), and still climbing out from under the Cambridge Analytica scandal, the firm will need to show sustained growth from Asia, Africa and Latin America to make up for the expected slowing of growth across both North America and Europe. The firm may very well become reliant upon Instagram to show growth in both advertising and user engagement metrics across already mature regions.

For me, this is the FANG name -- or FAANG if you add Apple (AAPL) , or even the FAANNG if you add Nvidia (NVDA) -- that I have played the least. I just don't like it. Now that I'm playing the FANG game with house money this quarter, let's see where opportunity lies.

View Chart »  View in New Window »

The amazing thing that a trader notices immediately upon gazing at this chart is the obvious impact of the already mentioned user privacy issue. Then the name, in spectacular fashion, simply regains trend. Starting a Fibonacci Fan model with January 2017, one quickly notices that the market catches the falling knife at the third Fib line of support, and once regaining the first line, the algorithms then use that specific line to climb the ladder, so to speak.

There are several likely possibilities upon tomorrow's earnings release. To remain on trend, the shares need to see support above $200 by August. An upside knee-jerk could put the last sale around an incredible $250 later this year, while I think you'll see the cavalry ride in at a rough $185 should disaster strike. So, how does the two-fisted kid with a little anger in his or her heart play the name? Hmm. Let's get creative. There are so many possibilities. (All trade examples use minimal lots, oh... and last sales change.)

Door Number One: The Safety Dance

-- Purchase 100 shares of FB (Closing sale: $210.91)

-- Sale of one July 27 $225 call (last $1.00).. This is called a "buy-write."

-- Purchase of one July $195 put (last $0.88).

In this example, the put protects the equity, basically offering the trader an"out" at $195, limiting the equity loss to $15. The sale of the call pays for the purchase of the put, but limits the profit for the same $15. If the shares stay within this $30 range, both options expire and the trader is left with an equity stake.

Door Number Two: Don't Touch Me

-- Sale of one November $165 put (last $1.54)

-- Sale of one November $255 call (last $1.86)

The object here is to stay just out of reach of the equity share price in both directions. FB is set to report the firm's third-quarter data in early November. the sale of an over-sized "strangle" might just allow the trader to pocket $340 without experiencing equity sized risk. The catch here is that the trader might get caught in either direction -- and then have to cover the options position at significant loss in order to avoid having to shell out for an equity stake. The question here becomes, Is a $90 range broad enough? Facebook's range for 2018 is less than $63. This could keep you up at night. A trader could easily broaden the range further, or bring it in a bit depending on individual risk tolerance. I find that in pursuing this strategy in order to make it pay, one eventually will feel some heat.

Door Number Three: Synthetic Short

-- Purchase one July 27 $210 put (last $5.30)

-- Sale of one July 27 $200 put (last $1.75)

Expecting a reversion to mean for the stock. I never recommend to anyone actually selling short stocks that trade above $100 with a beta of more than one. Facebook's beta is 1.3. So, how to express a bearish opinion? Buy a put. How to express a bearish opinion while keeping one's expenses under control? Put on what is known as a "bear put spread." In this example, the trader has cut the expense from $5.30 to a net of $3.55 by writing the put with the lower strike price.

In doing so, the trader has reduced maximum profit from a grand to $665, but if the shares go higher this week, at least the expense has been reduced.

Economics (All Times Eastern)

08:55 - Redbook (Weekly): Last 3.3% y/y.

09:00 - FHFA HPI (May): Expecting 0.4% m/m, Last 0.1% m/m.

09:45 - Markit Manufacturing PMI Flash (July): Expecting 55.1, Last 55.4.

00:45 - Markit Services PMI Flash (July): Expecting 56.5, Last 56.5.

10:00 - Richmond Fed Manufacturing Index (July): Expecting 18, Last 20..

16:30 - API Oil Inventories (Weekly): Last +629K.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (MMM) (2.60), (CNC) (1.77), (LLY) (1.30), (HOG) (1.42), (IPG) (.42), (JBLU) (.36), (LMT) (3.92), (DGX) (1.76), (SHW) (5.64), (UTX) (1.86), (VZ) (1.15)

After the Close: (T) (.89), (CB) (2.62), (SYK) (1.73), (TXN) (1.35)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Guilfoyle was long AMZN, GOOGL, LMT, NVDA, VZ equity.

TAGS: Investing | Global Equity | Technology | Economic Data | Earnings | Economy | Newsletter | Options | Stocks

More from Technology

How to Move on MongoDB

Bruce Kamich
May 20, 2022 2:19 PM EDT

Let's take a technical follow-up look at MDB -- and give a word of caution on this software name.

I'm Cautious on Marvell Technology Ahead of Earnings

Bruce Kamich
May 20, 2022 11:52 AM EDT

Let's review the charts and indicators.

If You're Looking for a Hero in This Market, Don't Look to Apple, ARKK

Ed Ponsi
May 20, 2022 10:30 AM EDT

Folks are asking if it's finally time to buy the ARK Innovation exchange-traded fund or Apple. Let's check the charts.

Don't Be in a Rush to Invest in Cisco

Stephen Guilfoyle
May 19, 2022 11:00 AM EDT

Someone already long this stock, who has taken a hit, doesn't need to liquidate unless...

Alteryx Has Yet to Bottom Based on Its Charts

Bruce Kamich
May 19, 2022 9:04 AM EDT

The technical signs indicate that the stock of the data analytics company still needs to build a base.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 10:10 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    "Market Timing for Dummies"
  • 01:44 PM EDT STEPHEN GUILFOYLE

    Stocks Under $10 Portfolio

    We're making a series of trades here.
  • 03:07 PM EDT PAUL PRICE

    Why Is Walmart Down Big Today?

    Besides its poor earnings report Walmart was way...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login