by John Kmiecik | August 6, 2012 8:32 am
When looking at a particular stock in a downtrend, traders often ponder whether the stock can fall any farther. No one can say either way with any certainty, but there might be indications that can help. A trader can look at the stock chart and examine the technicals and find out just how the company looks fundamentally.
Here is a trade idea on a stock that looks like it might be able to continue to drop based on those credentials.
The trade: Buy the September 21 Facebook (NASDAQ:FB) puts for $2.10 or less.
The strategy: The long put is a simple option strategy that can be used for a bearish outlook on a stock. The trade can profit if the stock falls and the put premium increases as the option moves further and further in-the-money. Maximum profit is almost unlimited only because the stock can only fall to $0 (which is highly unlikely), and the maximum loss is $2.10 if FB finishes at or above $21 at September expiration. Breakeven is $18.90 at expiration based on a cost of $2.10.
The rationale: One of the biggest stories of the year (as far as equities go) is the Facebook IPO and the subsequent fall in value of the shares. Can the stock fall any farther? It looks like it can. Facebook’s first earnings report was less than stellar and contained no forward-looking estimates. Brokerage and investment firms have dumped almost 2 million shares since the stock went public, which might inspire others to do so as well. Facebook’s lockup period ends soon, and when this happens, many others that own a stake in the company can sell their shares too.
Technically, the stock has been drifting lower since the beginning and gapped down after its earnings announcement. If the stock can get through what many analysts have referred to as the $20 barrier, shares might continue to plummet. Based on the fundamentals, Facebook is not considered cheap by any means — even at $20.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2012/08/long-puts-on-facebook-fb/
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