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Reviewing a Rather Bullish Bet on Facebook

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The stock is going to have to make a huge move soon.

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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.

Below, find some more great content from Schaeffer's Investment Research:


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Twitter: @schaeffers
No positions in stocks mentioned.
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