There has been some odd activity in the options market on Facebook
(NASDAQ:FB) lately. A couple of weeks ago, I mentioned that there was a huge bet against the equity
in the form of a bearish debit spread. Well, just two days ago (Wednesday, 10/2), we saw an opposing viewpoint on the trade. One trader is making a $500,000 bet that the equity could rise as high as $75 by November expiry (11/16/13). Below is a chart of the stock. Facebook has a confirmed earnings date for 10/30.
Chart courtesy of StockCharts.com
Via Trade Alert (a subscription service) I have one of the top options trades from Wednesday, 10/2.
Top Option Trades
FB 50.28 close, 10/2
25000 FB Nov13 75.0 Calls trade $0.27 BID
25000 FB Nov13 70.0 Calls trade $0.47 Above Ask!
Note how the November 70-strike calls were purchased at the ask price (offer price) -- although it was slightly above it. This indicates that this option was bought (to open) 25,000 times. The November 75-strike calls were then sold (to open -- we can conclude this based on the fact that the activity was on the bid price and not the offer.
The resulting trade was a net debit
of $0.20. We get this price by simply taking the amount that was paid for the 70-strike calls ($0.47) less the amount that was collected via the sold options ($0.27). This comes out to a net debit of $0.20. Multiply that by 25,000, and this is a $500,000 bet that the stock is going to surpass $70, but not make it past $75 by 11/16/13 (November expiry).
This debit spread is anticipating a rather sizable move in the stock. With FB closing yesterday (10/3) at $49.18, a move to break even level ($70.20) would equate to nearly a 43% move in less than two months. If FB were to move all the way up to $75 by November expiry, the trader stands to reap some huge awards. The 70-strike calls would be worth $5.00, resulting in a net profit of $4.80 per contract. In total, that could amount to a $12,000,000 win! So, risk $500,000 to make $12,000,000–a 24:1 risk/reward scenario. Not a bad payout. However, this is a “lottery type” bet, and the stock is going to have to make a huge move soon. Although, with earnings season coming up, anything could certainly happen.
Good luck trading out there.
This article by Peter Bryans was originally published on Schaeffer's Investment Research.
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No positions in stocks mentioned.