Facebook: Postmortem for a Bear With Psychological Problems

By Michael Comeau  OCT 24, 2012 11:25 AM

Facebook reported better-than-expected earnings after the close yesterday.


MINYANVILLE ORIGINAL Yesterday after the close, Facebook (Nasdaq:FB) delivered exactly what it needed to crush the bears: A meaningful acceleration in mobile advertising revenues.

Facebook reported Q3 earnings of $0.12 per share, beating estimates by a penny. Revenues were also ahead of expectations at $1.26 billion.

The company's advertising revenue was up a whopping 36% year-over-year, with a significant 14% coming from mobile.

Payments revenue was predictably slow, showing a smaller 13% year-over-year increase. With the implosion of Zynga (Nasdaq:ZNGA), this business line will stay under pressure, but that's not what investors care about now.

Sentiment towards Facebook is all about mobile advertising dollars and it just made a big statement with that 14% number, sending the stock up over 20% today.

Now, I was short Facebook heading into the quarter, and that means I'm on the losing end this morning. That means no dinner at Sizzler, and no new Apple (Nasdaq:AAPL) iMac, which turned out to be the star of the show at yesterday's press event.

However, I feel doubly stupid because I passed up the easy-money trade on Facebook, which was betting on a huge move rather than a directional one.

Here's what I wrote on Monday in MInyanville's Buzz & Banter (click here for a FREE two-week trial):

Call me crazy, but Facebook (FB) options are looking awfully cheap ahead of earnings tomorrow.

The $19 straddle on the weekly options implies a ~12.5% move by the end of the week. While 130%+ implied volatility readings seem expensive on the surface, in this case, the pricing actually seems awfully conservative to me when you think about how controversial Facebook is, and all the mixed noise this quarter, which includes:

1. Mark Zuckerberg's bullish-on-mobile interview at the TechCrunch Disrupt Conference
2. COO Sheryl Sandberg's CNBC appearance where she talked mobile engagement but not revenues.
3. A mountain of analyst target-price cuts and the BTIG downgrade to sell.
4. The Barron's article.
5. The blow-up at Zynga (ZNGA), which destroyed sentiment towards social gaming.

I echoed these points in yesterday's earnings preview:

In fact, I think the market is underestimating the potential volatility in the stock after the report. As of the time I'm writing this, the at-the-money straddle on the weekly options implies that investors are expecting a 12% move in the stock by Friday.

I would guess we're in store for a 15% move at a minimum, and in fact, I partially hedged my short position (transforming it from a rather large no-guts, no-glory trade to a more garden-variety speculative bet) because if I'm wrong, I'm not going to be a little wrong. I'm going to be a lot wrong.

Well at least I was right about something -- Facebook is up a lot more than 12% today, and that $19.50 straddle is trading at $4.55, for an 82% gain in one day. So why did I pass up easy money to swing for a homer on the short side?

Because I wanted to hit a big home run instead of going for a high-probability single. In fact, as the clock ticked down to 4:00 p.m yesterday., I was strongly considering buying some Facebook calls to turn my position into a straddle. I'm not exaggerating this at all. I had buy orders entered literally at 3:59:45 p.m., but I failed to pull the trigger.

But no, I wanted to be a big boy swinging for the fences instead of the single.

And as we all know now, that high-probability single turned out to be a grand slam.

Compounding my frustration is the fact that throughout 2012, my most consistently profitable short-term trades have come from speculating on underreactions or overreactions to earnings reports on momentum stocks!

Now, I've always felt that this type of public mea culpa was slightly self-aggrandizing, as if to say, "Ooh! Look at how modest I am!"

However, there are lessons to be learned here.

Know thyself. Do your best to monitor your emotions, so you can get some sense of when you're crossing over to a land of irrationality, and counteract it.

And in terms of actual trading, never pass up easy money in the chase for big money, because the easy trades are few and far between.

Twitter: @MichaelComeau

Position in AAPL

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