FB Earnings Play

10/29/31

FB earnings come out on 10/30 after market close. We are looking to place a non-bias iron condor that capitalizes on the expected volatility contraction. I accidentally placed this trade a day earlier than I intended, so we'll see if this makes a difference.

Above is the option chain on the day before earnings. The NOV1 weeklys have an expected move of 6.06, and the IV of 159% should drop around 100 points. Let's look at the option chain for the following day.

Above, we can see that on the day leading up to earnings, the IV for the NOV1 weeklys increased to 173%. The expected move dropped down to 5.49, because there are fewer days until expiration. We'll have to look at the premiums for the 2 dates to see if placing the trade early made any difference. Our trade criteria is shorting the 84% OTM strikes and making sure we are outside the expected move.

• 10/29 FB Iron Condor
• STO Nov1 58 C (86% OTM, >8.5 points over)
• BTO Nov1 60 C
• STO Nov1 42 P (85% OTM, >7 points under)
• BTO Nov1 40 P
• Credit = .46
• ROR = 46/154 = 30%

If we waited until just prior to earnings:

• 10/30 FB Iron Condor
• STO Nov1 56 C (84% OTM, 7 points over)
• BTO Nov1 58 C
• STO Nov1 42.5 P (84% OTM, 6.5 points under)
• BTO Nov1 40.5 P
• Credit = .60
• ROR = 60/140 = 42%

Now we can see that waiting to get in pays off. The higher IV and slightly narrower strikes makes a huge difference. Plus, if FB had moved more than the .38 we could have shifted our strikes to center our condor around the trade price.

Update 10/31/13

Last night FB reported earnings of $0.25, beating the projected $0.131. Still, it gapped down at open, but eventually finished the day +1.19. With the small overall movement and the IV drop to 60% I was able to buy back my shorts for cheap. This left me long the 60 C and the 40 P just in case...

• BTO Nov1 58 C @ .03
• BTO Nov1 42 P @ .01
• Net = 46 - 4 = $42
• ROR = 42/154 = 27% in 2 days