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How to Trade Facebook Ahead of Earnings


Investors are worried that Facebook may take much longer than expected to solve its mobile ad problem.

MINYANVILLE ORIGINAL Facebook Inc. (NASDAQ:FB) will report its third-quarter earnings today after the close. The consensus estimate is for an announcement of earnings per share of $0.11. This will be Facebook's second earnings announcement as a publically traded company. Facebook met consensus earnings estimates of $0.12 on $1.18 billion in revenue last quarter and the stock sold off sharply, down 11.7% after the report.

With more users turning to their mobile devices for access, Facebook has had difficulty monetizing its mobile platform. The main challenge for Facebook is redesigning its mobile apps to make more room for ads while still maintaining user accessibility. Mobile ad revenues are a major concern for Facebook investors. Investors are worried that Facebook may take much longer than expected to solve its mobile ad problem.

Zynga's (NASDAQ:ZNGA) troubles also weigh on Facebook. Zynga accounted for almost 15% of Facebook's revenue last quarter. Zynga has been struggling to generate revenue with its older games as users leave them for newer games. Zynga has announced that its game revenue has declined sharply as it faces problems similar to Facebook's.

The end to another round of employee lockups is also putting pressure on the stock. On October 29, Facebook employees will be able to sell 234 million shares if they so choose. The last time Facebook shares were unlocked, the stock fell 6% in a single day.

Facebook stock is currently trading around $19.50 in a range of $17.55-$45.00 since its initial offering. The stock has seen a decline of 48.61% since the company's IPO in May.

My Trade: Buying the Facebook Oct 26 (Wkly) 18.5-17.5-16.5 Put Fly for $0.15
Risk: $15 per 1 lot
Reward: $85 per 1 lot
Breakeven: $16.65, $18.35
Notes: The stock sold off hard after last earnings announcement and this trade has a great risk vs. reward setup.

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