Can FB Avoid TWTR’s Missteps to Rally On Earnings?

Facebook (Nasdaq: FB, 80.77) is scheduled to report earnings after Tuesday’s closing bell. FB share are up over 26% year to date, with one market commentator saying ‘I’ve never seen a stock want to get to $100 so badly as FB.’ There’s also the much talked about ’80-120 rule,’ which says in a bull market stocks that hit $80 tend to hit $100, and stocks that make it to $100 tend to rally to $120.

Facebook has traded in a 52-week range of $43.55-$81.16, having made a new all-time high earlier in the Tuesday morning session. The FB Oct Weekly 81 Straddle is priced around $5.75, implying a move of about 7.3%. Historically Facebook is strong on earnings – the stock has rallied 3 of the past 4 and 6 of the past 8 quarters. FB stock’s mean move on earnings is 9.7%, more than implied by this week’s straddle.

While some might be wary of social media stocks following Twitter’s earnings, Facebook is a much stronger performer and management will avoid the pitfalls that have plagued their younger cousin. User numbers and monetization of mobile is key, and Facebook has a history of success in both these areas.

My Trade:

Sell the 80-79 Put Spread for $0.45

Risk: $55 Per 1 Lot
Reward: $45 Per 1 Lot
Break-even (at expiration): $79.55