• Trading 101: A $4,000,000 Bet Against Facebook

    by  • September 13, 2013 6:00 am • Trading 101 with Peter Bryans • 5 Comments

    Facebook (FB) is no stranger to the market, and the stock has been making new highs recently. With the equity closing at $44.75 (as of 9/12/13) you can see how price has done nothing but go up since the company posted better-than-expected earnings in late-July. I have (featured below) a daily chart of the equity.

    (courtesy of StockCharts.com)

    One trader made a huge bet against the stock on one of the option exchanges. Courtesy of Trade Alert, I have the single top trade that was made in the options market yesterday, 9/12/13.

    Top Trades

    >> 10000 FB Jan14 45.0 Puts trade $4.37  MID
    >> 10000 FB Jan14 30.0 Puts trade $0.34  BID

    It appears that the trader made a $4,00,000 bet against the equity–the trade pays some huge profits if the equity plunges all the way to the $30 level. The company is expected to report earnings in late-October.

    As far as the breakdown of the trade, the January, 2014 45-strike puts were purchased for $4.37 (this is an at-the-money option) while the January, 2014 30-strike puts were sold for $0.34. This resulted in a net debit of $4.03 to the trader’s account (4.37 less .34). The trader paid $4.03 for each spread trade initiated–but did so 10,000 times! At $403  a contract, times the 10,000 contracts, this is a $4,030,000 trade. Certainly a lot is at stake.

    Max profits are achieved at the 30-strike. FB will have to dive all the way to $30 by January, 18, 2014 (the day these options expire). That is a downside move of ~33% which is certainly not a small move–but, as mentioned, the trader stands to take in some major gains. If FB does indeed plummet 33%, then they will take in $15 for the 45-strike puts, less the initial premium outlay of $4.03. This could result in net gains of $10.97 per trade. Multiply this by 10,000 and they could bank $10.97 million dollars.

    It’s always fun to watch the options market and pay attention to some of the large bets that take place everyday. In only a few months, we’ll see if this trade was indeed “smart” money or just “dumb” money after all.

    Good luck out there.

    About

    Peter Bryans joined the Schaeffer's Investment Research trading team as a Trader in April, 2012. A graduate of the Fisher College of Business at The Ohio State University -- where he concentrated in Finance -- Peter previously held internships with an insurance broker and a wealth-management firm. In his current role, Peter trades a variety of our real-time option services and also hosts our "Options Apprentice" weekly webinar presentations.

    http://www.schaeffersresearch.com

    5 Responses to Trading 101: A $4,000,000 Bet Against Facebook

    1. September 17, 2013 10:06 pm at 10:06 pm

      Are you sure this trade wasn’t done delta-neutral (i.e. bought the put-spread and bought stock)? To take a view on implied v/s realized volatility as well as the option skew (relative implied volatility level of 30 strike put v/s 45 strike put)?

    2. Prasanna
      September 16, 2013 11:14 am at 11:14 am

      I think that he is betting on the stock to go up from here. He stands to make smaller gains as his 45-strike puts will appreciate or at least overcome time decay. It helps to talk about the flip side as well. If the stock languishes at 45 or drift down slowly but stay above 30, it will be very painful to continue to hold on as both legs will start to erode in value.

      • cognitorex
        September 16, 2013 1:18 pm at 1:18 pm

        what’s break even mark…$40.97?

        • Peter Bryans
          September 16, 2013 2:04 pm at 2:04 pm

          Correct–the stock needs to be there by expiration and the intrinsic value will be $4.03. 45-strike less the 4.03 debit gets you at $40.97.

          • cognitorex
            September 17, 2013 12:02 pm at 12:02 pm

            thanks…presently selling NNN Oct $30 puts at $.60…think we have a bottom here..if I’m “put” I’ll at least get the dividend ($.40) creating a floor $1.80 below present trade range of $30.80

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