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Facebook Earnings: Raging Crosscurrents Are a Recipe for Extreme Volatility


Facebook reports third-quarter results after the close today and investors will go on a wild ride.

However, I will concede that it is entirely possible that Sandberg was playing rope-a-dope.

Oh well.

As Mr. Cooper likes to say, you puts up your money, you takes your chances.

Another important part of the Facebook revenue equation is payments revenue (12% of revenue last quarter), the primary source of which is embattled social gaming company Zynga (NASDAQ:ZNGA), which is on a losing streak, to say the least. On October 5, Zynga significantly lowered its full-year outlook as bookings continue to fall off a clip. (See: Why Zynga's Mess Is Bad for Facebook.)

Once growing faster than the advertising business, the payments business is falling apart as the fad of many social games has worn off.

It's also important to note that last quarter, an additional 4% of revenue came from ads generated by Zynga apps.

So if you're long or short Facebook, here's what you have to weigh right now:

1. The effectiveness of the new mobile-advertising push during the quarter.
2. Whether that push offset the slowdown in desktop usage
3. The impact of the social-gaming collapse.
4. A valuation that may be cheap on a big beat, or drastically expensive on a miss.

There are enough crosscurrents here to generate mass confusion, which in my opinion, will create some wild action in the stock.

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. That said, I still feel safer on the short side than the long side and I'm making my stand.

Good luck out there!

Twitter: @MichaelComeau

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