Facebook (FB) is a stock that I watch closely because a) it often throws off very profitable trading opportunities, and b) FB stock has a certain rhythm to it and respect for its various support and resistance levels that lends well to high-probability/low-risk setups.
Before I called it a 17-hour workday Thursday, I scanned the newswires on FB stock for news bits that I might have missed during the day. Looking over the past few days, what stood out like a sore thumb on the news wire was the daily “Facebook makes a new all-time high” headline.
When I last discussed FB stock on Jan. 31, after the stock staged its big post-earnings rally, I pointed to the breakaway gap as a sign of newfound momentum that would likely push Facebook shares higher in coming weeks.
Fast-forward to today, and FB stock in the meantime climbed another 10% higher after making a fresh all-time high every other day after Facebook earnings.
Yessir, and while that is not something one wants to actively trade against/fight, after this strong move, there now is an alternate way to profit from this, and that is by using options. First, however, let’s understand where FB stock trades in the medium-term picture.
A Look at FB Stock Charts
The uptrend from last summer is well intact and supported by the 100-day simple moving average (blue). However, FB stock is now also approaching the upper end of the entire uptrending channel, marked by the upper black line on the chart below. In other words, the steep post-earnings rally that FB remains in is slowly but surely approaching a respectable level of resistance where overbought readings in the stock could begin to slow down the stock at the very least.
The steepness of the post-earnings rise in FB stock is better seen on the below chart, which also shows the stock well extended above its 21-day (yellow), and even its 8-day moving average. In general, Facebook stock rarely remains extended above its 8-day moving average for long before mean-reverting back to the 8- or 21-day MA.
But because fighting such a strong momentum stock by trying to short the stock is often a losing game, there is an alternative I try to play when a stock’s slope gets too steep.
Looking at the current options table for FB stock, the April-dated (but even better so the June-dated) out-of-the-money calls look interesting to sell either outright or by using an out-of-the-money credit spread. As an example, a trader could now sell a June 75 call, and against it buy a June 85 call, for which he/she would get a net credit if the stock doesn’t close above $75 by June expiration.
The specifics of the strikes and month of the options I just described is not as important as the overall concept (there are almost uncountable ways of creating options spreads, thus I prefer to give a basic example as opposed to pointing to one specific one as the spread to consider). The beauty of selling call credit spreads against charts/slopes that are too steep to sustain is that you profit if the stock falls, if it stays flat, and even if goes against you up to the out of the money strike price.
The key to these trades in my opinion is to take profits once the stock mean-reverts, and not always waiting for the options to expire.
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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.