July 28, 2015 / 3:20 PM / in 2 years

Facebook's ascent has investors betting on more gains

NEW YORK (Reuters) - Investors in social media shares have zeroed-in on Facebook Inc FB.O, piling into stock options to add bullish bets on the company in the days ahead of its Wednesday earnings.

A picture illustration shows a Facebook logo reflected in a person's eye, in Zenica, March 13, 2015. REUTERS/Dado Ruvic

Facebook escaped a rout in social media stocks after last quarter’s results and its shares are up about 20 percent this year. The stock and a handful of other winners account for the bulk of the S&P 500’s .SPX gains this year.

The ascent has made Facebook one of the ten largest S&P companies in terms of market capitalization, with the stock now worth more than $260 billion - surpassing decades-old companies like Wal-Mart Stores WMT.N and Procter & Gamble PG.N.

Traders in the options market are betting on more gains for the stock after it reports results Wednesday.

“Facebook is definitely the standout leader in the group,” said Adam Sarhan, chief executive of Sarhan Capital.

“The stock’s recent performance, combined with the company’s leading position, explains the bullishness of the options activity,” he said.

Earnings seasons are typically choppy for stocks and even more so for social media companies, due to their high valuations and ongoing concern, in some cases, about their business models.

Last quarter, investors spooked by disappointing results sent shares of Twitter TWTR.N, LinkedIn LNKD.N and Yelp YELP.N down by more than 20 percent the week they reported results.

“These stocks are some of the most expensive stocks in the market,” said Stephen Massocca, managing director with Wedbush Equity Management in San Francisco.

“If numbers are disappointing and either growth or profitability looks out of reach, it’s very easy to see why investors would get out in a hurry,” he said.

The bullishness in Facebook’s recent options trading makes it unique in the sector. The number of open contracts in Facebook’s options has jumped 25 percent since the start of July, and is the highest since mid-January.

Analysts expect robust mobile pricing and strength in video ads to help the company post strong results when it reports after the close of trading on Wednesday. Strong YouTube viewership helped drive Google Inc’s GOOGL.O second-quarter results, boding well for video on Facebook’s own platform.

In July, open interest in Facebook’s call options, usually used for bets the stock will rise, increased by 24 percent, twice as much as the increase in puts, which are usually bets on a decline. For every put option, there are now nearly two calls open, the lowest this ratio has been in favor of puts, according to options analytics firm Trade Alert.

“The recent decline in Facebook’s put/call open interest ratio to an all-time low implies long positioning ahead of earnings,” said Jim Strugger, a derivatives strategist at MKM Partners.

In contrast, trading in the options of Twitter, LinkedIn and Yelp suggest high risk of volatile moves in the shares but give little clue to their direction.

Twitter and Yelp are expected to report results on Tuesday afternoon, and LinkedIn’s results are scheduled for Thursday.

So far, there is little to suggest traders are preparing for the kind of selloff that social media shares experienced last quarter, said Anshul Agarwal, equity derivative strategist at Bay Crest Partners in New York.

“For LinkedIn, Yelp, and Twitter, we haven’t witnessed particularly bearish options flow,” he said.

Reporting by Saqib Iqbal Ahmed; Editing by Nick Zieminski

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