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Investors brace for wild ride when Facebook announces earnings
July 25, 2012 / 11:02 AM / 5 years ago

Investors brace for wild ride when Facebook announces earnings

 * Heavy action in options ahead of Thursday earnings
 * Options markets forecast 14 pct post-earnings move
 * Big moves often expected in social media stocks
 By Angela Moon
 NEW YORK, July 25 (Reuters) - Investors in Facebook stock
are bracing themselves for something wild.
 After dropping about 25 percent since its highly anticipated
market debut in May, it is not surprising the market is bracing
for big swings in Facebook Inc shares after the social
media company reports earnings for the first time as a public
 The options market is forecasting a 14 percent move up or
down in Facebook shares following the earnings, which are due
after the bell on Thursday. That means options investors expect
the stock to rise around as much as $32 by Friday - or fall to a
low of about $24.
 But this is not entirely Facebook's fault. Investors tend to
gird for big moves ahead of a company's first results,
particularly when it come to social media. 
 "Investors tend to be more nervous about these social media
companies when it comes to their first earnings because there is
nothing to compare them to. These firms need to show the market
whether their business work or not," said JJ Kinahan, chief
derivatives strategist at TD Ameritrade.
 An analysis by Credit Suisse showed derivatives markets
overprice options ahead of the first earnings report from public
companies in the sector, such as Zynga Inc and Groupon
 In eight out of 11 instances, the options market forecast
larger swings than the actual post-earnings moves. The average
implied move was 14.4 percent - about what is expected in
Facebook - when the actual post-earnings change has been only
8.5 percent.
 "Especially for Facebook, because it was such a highly
anticipated stock that disappointed (the market), the demand for
protection is up ahead of earnings," said Kinahan.
 There is no doubt that Facebook's much-hyped IPO has been a
disappointment. The stock closed down 1 percent at $28.45 on
Tuesday, compared with $38 in its market debut on May 18 - the
most anticipated tech IPO since Google Inc went public
in Aug, 2004.
 The expected 14 percent post-earnings move "implies there is
significant uncertainty embedded in the derivatives market,"
said Terry Wilson, equity derivatives strategist at Credit
 "While historical skew data is limited, the one-month skew
is at its highest point, suggesting investor demand for
protection," Terry added.
 Skew measures the demand for downside put options versus
upside call options.
 Despite the steep decline in its share price, Facebook is
still trading at around 70 times earnings, according to Thomson
Reuters data. An analysis by Thomson Reuters StarMine puts the
company's intrinsic value at a modest $9.72 a share, or about
one-third its current value, based on estimates of the company's
projected growth for the next decade.
 Analysts, on average, expect revenue in the second quarter
to grow 28 percent to $1.15 billion. During the same period a
year ago, Facebook more than doubled its revenue.
 With over 900 million users, Facebook is the world's largest
social networking company, challenging established Web companies
for consumers' online time and for advertising revenue.
 As of Tuesday, 62,000 calls and 53,000 puts traded in
Facebook stock, according to options analytics firm Trade Alert.
Among the most actively traded contracts were the short-term
options known as Weeklys that expire on Friday, a day after
Facebook's earnings report. These include the Weekly $25 and $26
strike puts and the Weekly $25 and $31 strike calls.
 Option flow has been picking up over the past two weeks to
average 120,000 contracts per day, making Facebook the sixth
most actively traded option on an individual stock, according to
Trade Alert.

 (Reporting By Angela Moon; additional reporting by Doris
Frankel in Chicago; editing by Andre Grenon)

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