Unusually Large Facebook Option Trades Suggest 2020 Rally Has Legs

Facebook, Inc. FB shares are now up 38.2% in the past year despite a seemingly never-ending stream of negative headlines.

On Friday, the largest of a series of big Facebook option trades were more bullish than bearish, suggesting smart money is betting the Facebook rally continues.

The Trades: On Friday, Benzinga Pro subscribers received 11 option alerts related to unusually large trades of Facebook options. Here are a handful of the biggest:

• At 10:25 a.m., a trader bought 995 Facebook call options with a $250 strike price expiring on Oct. 16 at the ask price of $20.50. The trade represented a $2.03 million bullish bet.
• At 11:32 a.m., a trader bought 886 Facebook call options with a $295 strike price expiring on January, 15 2021 at the ask price of $13. The trade represented a $1.15 million bullish bet.
• At 11:59 a.m., a trader sold 1,500 Facebook put options with a $220 strike price expiring on January, 15 2021 at the bid price of $10.551. The trade represented a $1.58 million bullish bet.
• At 12:45 p.m., a trader bought 500 Facebook put options with a $220 strike price expiring on January, 15 2021 above the ask price at $10.551. The trade represented a $527,550 bearish bet.

Of the 11 total large Facebook option trades on Friday morning, six were calls purchased at or near the ask or puts sold at or near the bid, trades typically seen as bullish. Four trades represented calls sold at or near the bid or puts purchased at or near the ask, trades typically seen as bearish. One trade was executed near the bid-ask midpoint, a trade typically seen as neutral

All three of the largest trades of the morning were bullish.

Why It's Important: Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of the largest Facebook trades, it’s possible that at least some of the trades were institutions hedging against large positions in Facebook stock.

Full Steam Ahead: The latest headline hurdle that Facebook has seemingly overcome is an advertiser boycott related to hate speech on its platforms. However, Facebook reported 11% revenue growth in the second quarter and blew analyst earnings and sales expectations out of the water despite the boycott and the global pandemic.

Social media companies have been relatively insulated from the negative impact of COVID-19 as the shelter-in-place environment has triggered a surge in user engagement even as advertising rates plummeted.

On Thursday, Facebook COO Sheryl Sandberg said the company is prepared to work closely with the winner of the 2020 presidential election to address concerns over Facebook’s size and power. CEO Mark Zuckerberg was grilled by Congress last month as part of an antitrust hearing focused on U.S. mega-cap tech companies.

Despite the challenging environment, RBC Capital Markets recently named Facebook one of its top three tech stock picks to play a rebound in the online advertising market.

Benzinga’s Take: The biggest trade of the morning involved calls expiring in October with a break-even price of $270.50, suggesting 3.8% upside over the next two months.

However, the other two trades involved calls and puts that don’t expire until January, indicating a longer-term bullish outlook as well.

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