{"id":108505,"date":"2021-10-25T12:41:00","date_gmt":"2021-10-25T16:41:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=108505"},"modified":"2023-02-10T13:32:23","modified_gmt":"2023-02-10T18:32:23","slug":"what-is-the-options-market-telling-us-about-facebook-earnings","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/options\/what-is-the-options-market-telling-us-about-facebook-earnings\/","title":{"rendered":"What is the Options Market Telling Us about Facebook Earnings?"},"content":{"rendered":"\n<p>Facebook (FB) is certainly in the news today.&nbsp; I awoke to alerts on my phone about the \u201cFacebook Papers\u201d, the leaked trove of company data with a salacious series of revelations.&nbsp; Some are certainly shocking, showing that the company is slow to act upon or publicly disclose<sup>[i]<\/sup> problems within their system, but the stock\u2019s lackluster performance today implies that investors either already suspected these issues or don\u2019t view them as relevant to current and future earnings.&nbsp;<\/p>\n\n\n\n<p>While the societal implications of FB\u2019s negligence, willful ignorance, or worse, are manifold and meaningful, it is the latter topic \u2013 earnings &#8212; that should concern options traders, at least for today.&nbsp; <a href=\"\/campus\/traders-insight\/securities\/options\/what-is-the-options-market-saying-about-tesla-earnings\/\">As we have done before<\/a>, we will attempt to glean clues about what sort of reaction the options market expects from FB after it releases 3Q earnings this afternoon.&nbsp;<\/p>\n\n\n\n<p>According to Bloomberg data, the analyst consensus for FB earnings is $3.66.&nbsp; It is likely that investors expect the company to beat that consensus, since it has done so every quarter since 1Q of 2013.<sup>[ii]<\/sup>&nbsp; Interestingly, though FB\u2019s earnings consistently beat expectations, the stock\u2019s post-earnings response has been rather mixed.&nbsp; The average move has been 6.47%, and in no particular direction.&nbsp; The price of the shares fell on the day following 5 of the past 10 earnings reports.&nbsp;<\/p>\n\n\n\n<p>The simplest way to measure the options market\u2019s anticipation for a post-earnings move is to calculate the price of the at-money straddle with the shortest expiry.&nbsp; As I write this, FB is trading right around $325 and the combined prices of the calls and puts expiring this Friday are $20.60.&nbsp;&nbsp; That happens to be just about 6.3%.&nbsp; Unfortunately, while that is a quick and dirty methodology, popularized by floor traders who didn\u2019t have access to many analytical tools, it lacks subtlety.&nbsp; It tells us nothing about the implied volatilities across a range of strikes, which tells us much about whether traders are bullish or bearish.<\/p>\n\n\n\n<p>Graphing the option skew of a stock ahead of earnings gives us much more clarity.&nbsp;&nbsp; The graph below shows the implied volatilities of the range of strikes with expirations in each of the following 3 weeks<sup>[iii]<\/sup>:<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-multi-expiry-skew-for-fb-with-sequential-three-week-expirations\">Multi-Expiry Skew for FB With Sequential Three-Week Expirations<\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"669\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/D2CA9467-69B4-4981-9615-7BFB1B010644-1100x669.jpeg\" alt=\"Multi-Expiry Skew for FB With Sequential Three-Week Expirations\" class=\"wp-image-108526 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/D2CA9467-69B4-4981-9615-7BFB1B010644-1100x669.jpeg 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/D2CA9467-69B4-4981-9615-7BFB1B010644-700x425.jpeg 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/D2CA9467-69B4-4981-9615-7BFB1B010644-300x182.jpeg 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/D2CA9467-69B4-4981-9615-7BFB1B010644-768x467.jpeg 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/D2CA9467-69B4-4981-9615-7BFB1B010644.jpeg 1280w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/669;\" \/><\/figure>\n\n\n\n<p><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p>We see of course that the options that expire this week have the highest implied volatilities across the board.&nbsp; That is to be expected when earnings are imminent.&nbsp; We also see a typically steep, asymmetric skew.&nbsp; Remember that higher demand causes higher implied volatilities.&nbsp; Investors and speculators alike are more likely to buy puts to hedge their downside risk, with upside calls usually remaining as the province of bullish speculators.&nbsp;&nbsp; In this case, the elevated implied volatilities of options in the 300-325 range relative to those in the 330-360 range show that traders believe there is a higher likelihood for a modest downdraft than for a post-earnings rally.&nbsp;<\/p>\n\n\n\n<p>The Probability Lab function of the TWS<sup>[iv]<\/sup> allows us to gauge the options market\u2019s expectations for post-earnings moves with a high degree of precision.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">IBKR Probability Lab for FB Options Expiring October 29, 2021<\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"308\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/E38B609D-E68E-4F02-8731-12A9D8C6AC3B_4_5005_c-1100x308.jpeg\" alt=\"IBKR Probability Lab for FB Options Expiring October 29, 2021\" class=\"wp-image-108528 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/E38B609D-E68E-4F02-8731-12A9D8C6AC3B_4_5005_c-1100x308.jpeg 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/E38B609D-E68E-4F02-8731-12A9D8C6AC3B_4_5005_c-700x196.jpeg 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/E38B609D-E68E-4F02-8731-12A9D8C6AC3B_4_5005_c-300x84.jpeg 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/E38B609D-E68E-4F02-8731-12A9D8C6AC3B_4_5005_c-768x215.jpeg 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2021\/10\/E38B609D-E68E-4F02-8731-12A9D8C6AC3B_4_5005_c.jpeg 1162w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/308;\" \/><\/figure>\n\n\n\n<p><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p>As normal, we see that the market places the highest probability upon the range of outcomes around the current stock price.&nbsp; The plateau extends about +\/- 6% in either direction from the current $325 level, which is consistent with prior post-earnings moves.&nbsp; The key is that the implied probability of an upside move of greater than 6% is far lower than that of a similar drop.&nbsp; Traders who are interested in hedging or speculating can then input their own probability assessments and let the system offer trades that meet those criteria.<\/p>\n\n\n\n<p>The bottom line is this: despite the heavy flow of fundamental news about FB and its practices is having little impact upon the options market for the stock ahead of earnings.&nbsp; We see the usual amount of risk aversion with implied volatilities that anticipate a relatively normal post-earnings response.&nbsp; The most notable feature is the relative lack of speculative behavior in calls that anticipate an upward move of about 10%.&nbsp; Bullish traders might find that to be a buying opportunity, while bearish traders might find them an inexpensive way to hedge at-money calls.&nbsp;<\/p>\n\n\n\n<p>&#8212;<\/p>\n\n\n\n<p>[i] An example: one news report says that the company kept investors in the dark about how Facebook\u2019s user base was skewing older.&nbsp; Did people not realize this?&nbsp; I attended a high school class reunion last weekend (go T-Birds) that was largely planned and followed up on Facebook.&nbsp; I can\u2019t imagine that my and my classmates\u2019 kids would plan something similar on that platform.&nbsp;<\/p>\n\n\n\n<p>[ii] We can debate another time the extent to which the analyst community is systematically incorrect versus whether the company systematically underplays its prospects.<\/p>\n\n\n\n<p>[iii] On your TWS, Analytical Tools -&gt; Options Analysis -&gt; Multi-Expiry Skew, then set the desired expirations and strikes<\/p>\n\n\n\n<p>[iv] On your TWS, Analytical Tools -&gt; Options Analysis -&gt; Probability Lab<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Despite the heavy flow of fundamental news about Facebook and its practices, it is having little impact upon the options market for the stock ahead of earnings.<\/p>\n","protected":false},"author":4,"featured_media":108521,"comment_status":"closed","ping_status":"open","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[14700,6,19,8,9,22,26,3],"tags":[465],"contributors-categories":[13576],"class_list":{"0":"post-108505","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-ibkr-market-insights","8":"category-north-america","9":"category-options","10":"category-region","11":"category-securities","12":"category-stocks","13":"category-text-articles","14":"category-traders-insight","15":"tag-facebook","16":"contributors-categories-interactive-brokers"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.4) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ 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