- Facebook stock has fallen 5.5% since my last article on the company.
- Options traders have priced in a 9% move in February.
- Current options bets suggest an upside potential of roughly 5% in the coming weeks.
Facebook (NASDAQ:FB) stock has started 2020 on a positive note. It’s risen almost 4%, climbing from $204.76 on December 31 to $212.60 as of January 6. Now some options traders appear to be betting on the stock’s rise in the coming weeks and months. More precisely, they expect the stock to rise as much as 9% by the end of February.
I wrote about Facebook in my December 2 post Facebook Options Traders Think the Stock Can Rise More. Since then, the stock has surged from $201.64 to $212.60 as of January 6—a gain of about 5.5%.
Betting that Facebook stock will rise
Over the past few days, a large amount of bullish betting has been taking place. The open interest for Facebook’s January 24 $220 calls had increased by 1,872 contracts to a total of 17,359 as of January 6. According to data from Barchart.com, the call options were traded on the ask side, meaning that the calls were bought, thus representing a bet that the stock would rise. Right now, the options are trading for about $1.71 per contract, implying that the stock needs to surge to around $221.71 by the expiration date to break even. That’s an increase of about 4.2% from its current price.
In addition, the options for expiration on February 21 have seen the open interest level for the $215 calls surge by 1,832 contracts as of January 6 to a total of 6,961 contracts. The contracts were trading for about $8.20 each on January 6. That means for an option holder to earn a profit, the stock would need to rise to $223.20 by the expiration at the end of February—an upside potential of about 5%.
9% movement on the stock
Let’s look at FB’s options chain to assess its expected price movement and options traders’ sentiments.
Looking at the February 21 options, we can see a bid/ask for the call option with a $215 strike price of $8.05/$8.45. We can also realize a bid/ask for the put option with the same strike price of $9.95/$10.85. Note that the options strike is closest to FB’s closing price of $212.60 as of January 6. We can determine the expected price movement by applying the mid-prices of those options:
10.40 (215.00 put) + 8.25 (215.00 call) = 18.65/212.60 = 8.7%
This calculation implies that FB’s price could increase or decrease by about 9% by the February expiration, considering the $215.00 strike price. This assessment uses the long straddle options strategy. The calculation tells us that Facebook stock could move up to $231.73 or down to $193.47 by the expiration date.
Facebook’s implied volatility levels
Remarkably, at a $215.00 strike price expiring on February 21, the implied volatility levels for the options stand at 0.78% for the stock. In comparison, the SPDR S&P 500 Trust ETF’s (NYSEARCA:SPY) implied volatility level stands at 0.39% for the same expiration. This figure suggests traders expect Facebook stock to vacillate more quickly than the overall market by about two times.
Facebook stock’s divergence amid open calls and put contracts
We should also pay attention to the number of open call and put contracts. In Facebook’s case, the number of open call contracts at the $215.00 strike price outweighs the open put contracts by around 7x. On January 6, there were 7,183 open calls to 1,343 open puts. A buyer of the $215.00 strike price calls would need the stock to plunge to around $223.45 by the expiration date to earn a profit. This divergence means that options traders appear bullish on Facebook stock.
Want to read more of my recent technical analysis? Check out A Realistic View of AMD Stock after a Recent Rally, How to Buy Aurora Cannabis Stock with Minimal Risk, and Unusual Options Activity in TSLA and GE.