Facebook (FB) on Thursday served up a hefty dose of disappointment when it reported its earnings for the second quarter of this year. As the market continues to digest the lackluster earnings report, many investors are getting in on the options action for this seemingly overvalued stock that will likely not see its IPO price again for some time.
At the closing bell on Friday, the stock was down almost 12% to $23.70. It even dropped just below $23 during intraday trading. Since the company went public in May, it has taken a 40% haircut. It debuted at $38.
This movement has increased the amount of options activity for the stock for puts and calls. Notable are the puts that expire in November, which is when the largest amount of shares become available for trading, thanks to Facebook's lockup period expiring. On November 13, 1.3 billion shares will become available. Put volume for the November 25 strike is 10,480, the largest for the month. The volume for the November 35 put is 12,225. They sold for $3.70 and $11.70, respectively.
Puts expiring next month have generated considerable open interest, particularly those with strike prices in the $25 to $28 range. The August 26 put has the most open interest: 34,193 contracts. Next is the August 25 put with 28,993 contracts of open interest.
Considerable interest is also there for calls. On August 15, the first batch of stocks eligible for sale will begin flowing into the market. The August 30 call has 21,349 open interest contracts. It is followed by the August 32 call that has 20,807 open interest contracts and then the August 35 call with 19,087. In terms of volume, one of the most active strikes is the August 24, which had 14,363 contracts at the time of writing.
The fact that there is so much open interest is good for investors because it means there is more liquidity for the call option you are trading. Having more liquidity can give you just a little more peace of mind in case you need to close out your position before the strike expiration date.
In reporting its earnings, Facebook had to reveal that it lost money for the first time in its eight-year history. While it added more subscribers, the growth rate has slowed. Further aggravating the company's financial bottom line is its inability to make money from the growing number of users that are accessing its sites via mobile devices instead of the traditional desktop computer.
Specifically, Facebook reported earnings of $0.12 a share on $1.18 billion of revenues. Revenues for the quarter were up 32% over the second quarter of 2011. Even though that was 32% higher than last year and higher than what Wall Street analysts had estimated, Facebook stock still tanked.
Another worrisome bit of information that was disclosed in the earnings report deals with the company's net income losses. The company reported that GAAP net loss for the second quarter was $157 million, compared to net income of $240 million for the second quarter of 2011. The loss is largely attributable to the company's share-based compensation program and related payroll tax expenses. Without factoring in those items, the net income was $295 million, which is still only $10 million more than it was for the same period in 2011.
Also of concern is the company's operating margin. For the quarter, it was negative 63% compared to a positive 45% during the second quarter of 2011. I see the company's margins continuing to be under pressure, especially given the expansion efforts it has underway to "…help every person stay connected.." as CEO Mark Zuckerberg said in the Thursday earnings conference call.
That sounds so rosy, it makes me almost want to delete all of the negative information I pointed out earlier in this story about the company. However, then I remember investors want those connected people to do more than "like" each other's posts. They want them to click on the ads and make Facebook money! Whether or not the company can do that to the extent that its original $100 billion valuation demanded is now in question.