Facebook is Buy & Hedge eligible - just not Buy & Hedge worthy

by Wayne Ferbert on May 30th, 2012

The most anticipated IPO of the 21st century had another eventful day yesterday. FaceBook had its options market on the stock go live with trading yesterday. And how did FaceBook’s stock hold up? It promptly lost 10% of its value falling $3.07 to close at $28.84.

This stock just can’t seem to catch a break. I can imagine that the employee morale at the Silicon Valley based company is also finding new lows everyday that the stock does. As a side note: I read that the Instagram founders wanted a $2B valuation to sell to FB but settled on $1B because the FB team convinced them that the 1% stake they got in FB would be worth $2B once FB was worth $200B.

But that is enough excessive bashing of FaceBook. After all, this is a very good company that appears to be very well run and produces a very good client experience. It is just a bad stock. Good company. Bad stock.

But we asked last week what would have to happen to make Buy & Hedge invest in FaceBook. I can tell you that we still don’t like the stock and would not place it in our inner guru investment allocation. However, that doesn’t mean that you can’t buy it. This is the land of Buy & Hedge. As long as you can hedge it, you are eligible to go long or short any stock you want. So the question is: does FaceBook have a reliable and robust options market?

I looked at the options market for FaceBook and not surprisingly, the market was very robust in its first day. This is a mega large cap company with a manageable stock price at $30 per share so you would expect a lot of volume. The volume is leading to very tight spreads. The spread is 5 to 10 cents for nearly every strike from $25 to $35 for June, July, & August. The spreads past August extend up to 15 to 20 cents in some cases. This is very good for the options investor. You can bid with confidence and likely get a desired execution.

The volume in the first day was definitely skewed towards the put side. That is obviously a sign that more people are nervous about the stock. Of course, the stock was down just shy of 10% yesterday so put volumes being active shouldn’t surprise you. In the near months, the volume of puts was always materially higher than call volumes. The only month where call volumes are materially higher than put volumes is the January 2014 expiration. Clearly, people are looking to buy a lottery ticket for that month.

For the expirations between now and August, about 47% of the put volume was concentrated around the $28 to $30 strikes. About 65% of the call volume was concentrated around the $30 to $34 strikes. This volume concentrated to the strikes that are near- or just slightly out of the money on each side looks fairly normal.

It is too early to learn anything from this options market other than a few things: (1) the volumes are solid and as a result, the bid/ask spreads are tight – so bid with confidence; (2) puts are materially more popular meaning some pessimistic sentiment still exists in this stock – especially in the near months.

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