(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Options traders are betting that Facebook Inc. (FB) stock will rise more than 20 percent by June based on the contracts set to expire on June 15, 2018. Facebook shares have already had an outstanding 2017, climbing by 52 percent, versus an S&P 500 that has jumped by 17.50 percent. 

Even with the recent rise in Facebook's stock price, the shares trade at 21.7 times 2019 EPS estimate of $8.06. That's a fair valuation for a stock that is expected to see earnings growth of nearly 22 percent in 2019, according to data from YCharts.

This could explain why some traders are betting the stock will continue rising in 2018. The options market, based on one such bet, is implying a stock price of about $213, which would place Facebook's valuation at 26.5 times 2019 earnings estimates. 

FB Chart

FB data by YCharts

Big Bet

The $210 strike price calls have 44,000 contracts open and trade at roughly $3.50 per contract. This represents a notional value of nearly $15.5 million, a substantial bet given the length of the time until expiration. Shares of Facebook would need to rise to a price of $213.50 just for the options to break even, meaning the stock would have to climb by roughly 22 percent. 

Bullish Betting

Using a long straddle option, the options set to expire in June are pricing in a rise or fall in the shares of about 15 percent, putting the stock in a trading range of $148 to $202. That's because the cost to buy one put and one call is $27.

The number of calls with an open interest outweighs the puts, with 13,300 contracts open on the calls, and only 9,400 puts currently open. (See also: Profit On Any Price Change With Long Straddles.)

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Limited Put Activity

The puts do not see nearly the same amount of activity as the calls, with the most active put options being the $155 strike price, with only 12,300 contracts of open interest. 

The directional betting of the options appears to favor that of a rising stock price, and it seems the bets are that Facebook's stock price could rise significantly by June. 

Expectations appear to be high for Facebook heading into 2018 for a stock that has already performed exceptionally in 2017. This means the stakes will be even higher for Facebook to continue to meet and beat estimates. 

 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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