Today I would like to report on the gains I made last Friday on the trades I told you about that I had placed last Monday in advance of Facebook’s (FB) earnings announcement on May 3. I was fortunate enough for the stock to take a moderate drop after the announcement, and have some thoughts on how I might play the FB earnings announcement in 3 months.
Closing Out Last Week’s Facebook Trades
A little over a week ago, I passed on a pre-earnings trade I had made on Facebook in advance of their May 3 after-market announcement. Essentially, I bought calendar spreads (long side 16Jun17 series and short side 05May17 series) at the 150, 152.5 and 155 strikes when FB was trading just under $152.
I was hoping that the stock would barely budge after the announcement. I was lucky. It did just that, falling a bit to close out the week at $150.24, about $1.50 lower than it was when I bought the spreads.
Near the close, I was able to buy back all of the expiring options (puts at the 150 strike, calls at the 152.5 and 155 strikes for $.02 or $.03), and sell every long call for a higher price than I had paid for the original spread.
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) Spread closed for $2.19, gaining $140.
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) Spread closed for $3.75, gaining $72.
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) Spread closed for $1.55, gaining $100.
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) Spread closed for $1.62, gaining $6.
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 closed out these trades on Friday, I did not incur a commission at all (only paid the $.10 per contract clearing fee).
I made a net profit of $318 on an investment of $986, or 32% on an investment that lasted for 5 days. The Terry’s Tips portfolio that trades FB options gained 22% last week, and now has gained 215% for the year (after commissions). The stock has gained 30% in 2017, but our portfolio has done 7 times that number.
The risk profile graph I published in the last blog assumed that implied volatility (IV) of the June options would fall from 24% to 16%. I was a little too conservative. IV fell to 18%, and the spreads performed a little better than the graph had projected.
While this is certainly a nice gain for the week, it only came about because I was lucky enough for the stock not to fluctuate very much. In the future, I think I might buy more spreads at strikes below the current stock price of FB because the clear pattern around announcement time has been for the company to exceed expectations by a nice margin and the stock falls a small amount on the news.
Tags: Calendar Spreads, Calls, diagonal spreads, Earnings Announcement, Earnings Option Strategy, Earnings Play, ETP, implied volatility, Monthly Options, Profit, profits, Puts, Stocks vs. Stock Options, TastyWorks, Terry’s Tips, Weekly Options