Facebook (FB) has had a great year so far, gaining just over 30%. Terry’s Tips has an actual portfolio that trades calendar and diagonal spreads on FB. This portfolio has gained 157% this year, more than 5 times as much as the stock has gone up. A big part of this gain came just after the January earnings announcement when the stock dropped a small amount on the news.
FB announces earnings after the close on Wednesday (May 3), and I would like to share some trades I made today in my personal account at my favorite broker, tastyworks. These trades approximate the current risk profile of the Terry’s Tips’ FB portfolio.
Interesting Earnings Play on Facebook
Terry’s Tips carries out 9 actual portfolios for paying subscribers. After the first four months of 2017, all 9 portfolios are in the black. The composite average has gained 34.5% for the year, certainly an outstanding result. The FB portfolio is by far the greatest gainer. We know that we cannot expect to continue these extraordinary gains for the entire year, but we are confident that many portfolios will continue producing gains which outperform the market averages.
Implied volatility (IV) of FB options tends to escalate prior to an earnings announcement. For example, it is about 45% for the 05May17 series that expires this Friday. This compares to 24% for the 16Jun17 series that expires six weeks later. We will buy the relatively cheap 16Jun17 series and sell the more expensive 05May17 series.
Here are the spreads I made today when FB was trading just under $152:
Buy to Open 2 FB 16Jun17 150 puts (FB170616P150)
Sell to Open 2 FB 05 May17 150 puts (FB170505P150) for a debit of $1.49 (buying a calendar)
Buy to Open 1 FB 16Jun17 150 calls (FB170616C150)
Sell to Open 1 FB 05 May17 152.5 calls (FB170505C152.5) for a debit of $3.03 (buying a diagonal)
Buy to Open 1 FB 16Jun17 155 calls (FB170616C155)
Sell to Open 1 FB 05 May17 152.5 calls (FB170505C152.5) for a debit of $.55 (buying a diagonal)
Buy to Open 2 FB 16Jun17 155 calls (FB170616C155)
Sell to Open 2 FB 05 May17 155 calls (FB170505C155) for a debit of $1.59 (buying a diagonal)
The second and third spreads together essentially create a calendar spread at the 152.5 strike price. This was necessary because the 16Jun17 series does not offer that strike.
These spreads cost me a total of $974 plus $12 in commissions at tastyworks’ ultra-low rate of $1.00 per contract. Even better, when I close out these trades, probably on Friday, I will not incur a commission at all (only pay the $.10 per contract clearing fee).
Here is the risk profile graph which shows the expected gains and losses from these trades after the close on Friday, May 5, 2017. The graph assumes that IV of the June options will fall from 24% to 16%:
These spreads will do best if the stock remains flat or moves moderately higher. If it falls within the range of about $150 to about $155, I should make about 40% for the week. While we all know that anything can happen after an earnings announcement, if the last announcement is any example, it could be a good week.
One thing I like about these kinds of spreads is that your risk is clearly limited, and you can’t lose your entire investment because the long options will always have a greater value than the options you sold to someone else.
As with all investments, especially with options, you should only use money that you can truly afford to lose.