Facebook Options Open, Stock Gets Destroyed

Options on Facebook began trading yesterday, and I think it's safe to say there was a little more volume on the Put side than the Call side. The volume in the options was unprecedented, with the largest number of bets going to the July 25 puts, indicating a market sentiment that Facebook will drop to the $25 range by mid-July.

The stock seemed to take its cue from the negative bias in the options yesterday, cratering through the $30 support level to close at $28.84 after putting in a new low of $28.65 - a 10% drop for the day. The stock, now being called "the worst IPO in a decade", has shed over $20 billion in market cap in just the first 6 trading days.

“When something is this broken this quickly, they sell and move on,” said Sam Hamadeh, managing director of US research firm, PrivCo.

“Historically, initial public offerings that trade down this quickly don’t ever recover. Brokers have lost quite a bit of money and many will have their own rules about dropping out when it passes that $30 barrier.”

With this much Facebook hate flying around I'm starting to wonder if I should go long. I'm not a Facebook fan, and I can easily see them going the way of MySpace and Friendster when the next big thing comes along, but with market sentiment this negative it almost has to be a buy. Everyone, myself included, is trying to call the bottom. Henry Blodget said the stock is fairly valued at between $16-$24, and European structured warrants appear to agree with him, so maybe that's the number.

What do you guys think? Where is the bottom in this deal? And where does it make sense to go long? Or at least buy a few calls? Anyone trading the option on it yet? I happen to know that a certain monkey who shall remain nameless legged into the August 25 puts yesterday. Smart move?

 

I mean I don't want to go on a rant about Facebook's business model, operations, strategy and corporate governance (as I'll just be echoing what everyone's been bellowing from their soapbox for the past couple of weeks), but is anyone really surprised by this?

 

No one should be shocked by any of this.

It hasn't even been two calendar weeks and its market cap is down $49B. I don't understand where a company whose only value is untapped user-base potential (users that sign up for a free service to keep in touch with people) gets off being valued what it was valued at. The second someone figures out how to monetize the user-base to a point that makes this company truly valuable is the day people start moving away from Facebook - I guarantee you those ideas will infringe on the overall user experience and user privacy.

You're born, you take shit. You get out in the world, you take more shit. You climb a little higher, you take less shit. Till one day you're up in the rarefied atmosphere and you've forgotten what shit even looks like. Welcome to the layer cake, son.
 
Nefarious-:
No one should be shocked by any of this.

It hasn't even been two calendar weeks and its market cap is down $49B. I don't understand where a company whose only value is untapped user-base potential (users that sign up for a free service to keep in touch with people) gets off being valued what it was valued at. The second someone figures out how to monetize the user-base to a point that makes this company truly valuable is the day people start moving away from Facebook - I guarantee you those ideas will infringe on the overall user experience and user privacy.

Where are you getting this 49B number from? There are 2.14 B shares outstanding, and the highest price the stock hit was 45/share. That leaves a max valuation of 96B. The IPO valued the company at 81B...

-MBP
 
Best Response
manbearpig:
Nefarious-:
No one should be shocked by any of this.

It hasn't even been two calendar weeks and its market cap is down $49B. I don't understand where a company whose only value is untapped user-base potential (users that sign up for a free service to keep in touch with people) gets off being valued what it was valued at. The second someone figures out how to monetize the user-base to a point that makes this company truly valuable is the day people start moving away from Facebook - I guarantee you those ideas will infringe on the overall user experience and user privacy.

Where are you getting this 49B number from? There are 2.14 B shares outstanding, and the highest price the stock hit was 45/share. That leaves a max valuation of 96B. The IPO valued the company at 81B...

I could have sworn I remembered seeing $110B on its opening day on Google Finance.

You're born, you take shit. You get out in the world, you take more shit. You climb a little higher, you take less shit. Till one day you're up in the rarefied atmosphere and you've forgotten what shit even looks like. Welcome to the layer cake, son.
 

Frankly, i'd be tempted to place some bets around their earnings time which I believe is in July. If sentiment is so bearish at that point anything other than a total and complete miss could be bullish, especially with so much short interest bearing on it at that point. I'd only buy some calls though. For now, the trend is your friend.

Also, Nefarious, I just saw on CNBC that they were valued at 104 billion at the ipo and currently 79 billion. Are they putting cash in their valuation instead of using straight market cap? That might make up the discrepancy.

 
Addinator37:
Frankly, i'd be tempted to place some bets around their earnings time which I believe is in July. If sentiment is so bearish at that point anything other than a total and complete miss could be bullish, especially with so much short interest bearing on it at that point. I'd only buy some calls though. For now, the trend is your friend.

Also, Nefarious, I just saw on CNBC that they were valued at 104 billion at the ipo and currently 79 billion. Are they putting cash in their valuation instead of using straight market cap? That might make up the discrepancy.

That might be it. Might also be that I need a vacation because everything is starting to run together :P

You're born, you take shit. You get out in the world, you take more shit. You climb a little higher, you take less shit. Till one day you're up in the rarefied atmosphere and you've forgotten what shit even looks like. Welcome to the layer cake, son.
 

Look at it this way- Facebook's market cap isn't down by $36 billion (as of this writing)- in the same way, that a house in California isn't really down 60%. The distortion field created by a bubble doesn't represent underlying value even remotely. So, these numbers are really phantom value- illusory. That's not to say, of course, that people haven't' lost real money. I make this argument for two reasons:

1) Not all of the company has been available on the open market. Yeah, mathematically, the implied market capitalization was $104 billion, but that is very different from the company floating most of its shares. Look at the 'carnage' that has happened already and imagine what will happen once another 50+% of the company is floated. Then we will know the market consensus on Facebook value.

2) It was never worth $104 billion. For anyone to honestly believe that Facebook was worth more than one of the quintessential American franchises - McDonald's ($91 billion market cap)- then they were a fool who was going to be parted with his/her money anyway. I'm mean there is no greater symbol of American cultural influence in a country than to see a McDonald's on the corner, am I right? That versus a company that did less than $1 billion in profit in 2011. This is not to dismiss Facebook as a business (which has become vogue in the last few weeks), just that the price was wildly unreasonable.

And Eddie- no, you shouldn't go long. I get the impression that you lean toward value investing; and if that is the case, this is a horrible value at the current price.

Bene qui latuit, bene vixit- Ovid
 
manbearpig:
I bet implied vols are much higher than real vols right now...
Strange how much I agree with you all the time. Truthfully, no one knows what the hell to expect from facebook. With all of the big money backing it, potential growth, and past popularity it's unlikely that facebook will tank as a company...but no one really seems to be sure exactly how big they can get. Between this and Apple's performance after they release the iPhone 5, no one really has a handle on what these companies will look like.
Get busy living
 
freeloader:
Anyone considering a straddle? I'm assuming high volatility and uncertainty on price direction is a probably a decent trade.

I really don't see that much of a price spike for it to be worth it over shorting it. I don't know if I'll ever go long FB, but I'll think about it when the price starts making sense. When their P/E hits 10 I'll start looking at it. Problem is there's not much info to do fundamental analysis or technical.

 
Kools:
Edmundo, When the IPO launched, you wrote about how Morgan Stanley priced it perfectly. Do you still feel the same way?

Yeah, absolutely. Though I don't think MS had much to do with the final pricing. I think they balanced supply and demand for shares based on the float and probably caved in to Zuckerberg's insistence that the whole shebang was worth $104 billion (which is what Zuckerberg personally valued the company at a month earlier in the Instagram acquisition).

Any way you slice it, Facebook sold out at the absolute peak, which is perfect pricing in my book.

Plus, they have the added satisfaction of watching something they sold at the top crash 20%+ after they sold it. That was always the most satisfying aspect of being on the right side of a trade for me. It wasn't just knowing that I was right, it was getting to watch the other guy being destroyed because he was wrong. I'm betting Zuckerberg is a vindictive and put-upon nerd who is probably secretly enjoying watching the Wall Street jocks twist in the wind.

 
Edmundo Braverman:
Kools:
Edmundo, When the IPO launched, you wrote about how Morgan Stanley priced it perfectly. Do you still feel the same way?

Yeah, absolutely. Though I don't think MS had much to do with the final pricing. I think they balanced supply and demand for shares based on the float and probably caved in to Zuckerberg's insistence that the whole shebang was worth $104 billion (which is what Zuckerberg personally valued the company at a month earlier in the Instagram acquisition).

Any way you slice it, Facebook sold out at the absolute peak, which is perfect pricing in my book.

Plus, they have the added satisfaction of watching something they sold at the top crash 20%+ after they sold it. That was always the most satisfying aspect of being on the right side of a trade for me. It wasn't just knowing that I was right, it was getting to watch the other guy being destroyed because he was wrong. I'm betting Zuckerberg is a vindictive and put-upon nerd who is probably secretly enjoying watching the Wall Street jocks twist in the wind.

Still don't get where this 104B valuation is coming from...

38 a share time 2.14B shares outstanding gives a market cap of 81B.

-MBP
 

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