Pre-Earnings Facebook Bulls Bet Against the Odds

FB stock has a history of negative earnings reactions

FAANG earnings will wrap up this week when Apple (AAPL) unveils its quarterly results after the close on Thursday, Nov. 1. Ahead of this are earnings from Facebook, Inc. (NASDAQ:FB), with the social media giant set to report its third-quarter numbers after the close tomorrow, Oct. 30. FB stock was last seen trading up 1.2% at $147.06, and options traders are anticipating an even bigger move for Wednesday's trading.

Currently, Trade-Alert pegs the implied earnings deviation for FB at 12.4%, much wider than the 5.5% next-day move the stock has averaged over the past two years. Five of these post-earnings moves have occurred to the downside, and just one -- a historic 19% plunge last July -- was large enough to match or exceed the percentage move the options market is pricing in this time around.

Over the past two weeks, pre-earnings options traders have targeted FB's November 155 call, with more than 10,000 new positions initiated. Data from the major options exchanges confirms at least some buy-to-open activity here, indicating options traders are positioning for a break above $155 by standard November options expiration.

In today's trading, volume is running below average levels, with 49,105 calls and 25,311 puts on the tape so far -- compared to an expected intraday amount of 52,000 calls and 37,000 puts. Most active is the November 170 call, where it looks like some new positions are being purchased for a volume-weighted average price of $1.03. If this is the case, breakeven for the call buyers at the close on Friday, Nov. 16, is $171.03 (strike plus premium paid).

Outside of the options pits, analysts have been bullish on Facebook. While 28 of 32 covering analysts maintain a "buy" or better rating, the average 12-month price target on FB stock sits all the way up at $206.74.

Looking at the charts, Facebook has struggled since that July 26 post-earnings plunge. Specifically, the shares are down 16.6% since closing at $176.26, and are off nearly 33% from their July 25 record high of $218.62. Plus, FB hit an 18-month low of $143.80 last Friday. This puts the FAANG stock at risk of bearish brokerage notes in the wake of another negative earnings reaction.