What’s Next?..Options Trading On Facebook (FB)

Options on Facebook (NASDAQ: FB) will be available as early as May 29th. With volatile price action in FB after its IPO, traders will look to options strategies to profit

In the next several months FB is going to face pressure to grow into its current 100 Billion dollar valuation. As a growth stock trading over 100 times earnings, any sign of slower growth in Facebook will cause the stock to plummet quickly.Traders who do not think Facebook can hold its current valuation have a number of options strategies to profit from any fast downside price action.

Depending on implied volatilities of FB options, traders can be either short or long volatility. It is unlikely that FB stock will increase or decrease in value by more than 30% in one year. If options are trading will implied volatilities greater than 30%, traders should be net sellers of options. Selling vertical call spreads, which involves selling call options at strike prices above the current price and buying a call option at strike prices even farther out from the current price. This strategy will be profitable if FB maintains its price or decreases.

Notes WallachBeth Capital’s Randy Sharringhausen, an institutional options market expert, “Even if the company’s fundamentals don’t come close to justifying its IPO price, this is a company that has 450 million customers that visit every day and a corporate treasury flush with enough currency to finance any number of  major acquisition to better monetize its customers.  This should prove to be an interesting name to trade by the hedge fund and risk arb community, as well as the long/short managers.”

If FB stock has implied volatilities less than 30%, a net buying options strategy may be more profitable. Buying 5-10% out of the money put spreads with several months until expiration have the potential to return double or triple the initial investment. Last quarter Facebook showed declining revenue growth. If FB does not deliver the street’s expectation of increased revenue growth in its next filing, the stock can easily fall 10%.

Selling call spreads and buying put spreads are bearish strategies. FB has many hurdles to overcome to justify its high valuation. Facebook is overvalued based on trailing twelve month revenue multiples relative to Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG). Facebook has a price to revenue multiple over 25, while AAPL and GOOG are trading at sales multiples less than 10. Furthermore, General Motors (NYSE: GM) has decided to pull its advertising on Facebook, the lock-up period for investors will come to an end, and lastly FB cannot expand its services into China. If FB is trading above $38 a share on May 29th when options on FB are available, bearish strategies such as selling call spreads or buying put spreads can be profitable.