by Tyler Craig | December 31, 2013 1:33 pm
Heading into year’s end, social media stocks like Facebook (FB) and Twitter (TWTR) are being hit with some profit taking.
And why shouldn’t they be?
As a result of a massive December rally — especially in Twitter — both hot social stocks became massively overbought and in dire need of a pullback. Before succumbing to gravity, TWTR was up 80% while FB stock was up a more modest 25% for the month.
The recent dip in FB stock is a welcome development for traders like myself wary of chasing stocks that have already ascended into the stratosphere. Indeed, from a risk-reward perspective, both stocks are quite a bit more appealing now versus a short week ago.
However, of the two social media darlings, Facebook stock certainly has less volatility and arguably a more sustainable uptrend, making it the superior choice for traders with a more conservative tilt. So, let’s break down the FB stock chart and piece together a high-probability options play.
Three developments of note stick out on Facebook’s stock chart:
To profit from a turnaround in FB stock, consider selling the Feb 46 put for $1.07. By shorting this out-of-the-money put, you’re basically betting FB will remain above $46 by February expiration. The max reward is limited to the initial $107 credit received at trade inception.
By selling the put, you obligate yourself to buy FB stock if it should fall beneath $46 by expiration. Should this occur, your cost basis would be $44.93 ($46 – $1.07). If you’re not a willing buyer of FB at this level, you could simply exit the trade by buying back the put if FB falls beneath $46. The loss should come out to about $260.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
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