The once popular momentum stock Facebook Inc (NASDAQ:FB) has turned into a total bore. Ever since its midsummer earnings announcement last year it’s been lulling traders to sleep with unenthusiastic movement.
With the price pinned at $75 the past seven months and volatility in the dumps, FB stock has landed itself squarely on the “why bother?” list.
And yet, if Thursday’s pop is any indication, perhaps FB is ready to start rockin’ and rollin’ again.
On a day where the S&P 500 sat virtually unchanged, FB stock’s 2.5% jump was a standout. The rally lifted FB above near-term resistance at $78.50, creating a breakout which could carry shares back to its all-time high north of $82.
What’s more, FB has largely sat out the ongoing tech stock rally while its peers have captured large gains. With many stocks in overbought mode, perhaps it’s time for them to pause while FB catches up.
Further buttressing the argument for Facebook stock to start moving again is the cyclical nature of stock volatility. Over time, stock prices tend to alternate between periods of volatility compression and those of volatility expansion. Long periods of volatility compression — the likes of which we’ve seen in FB — are inevitably followed by a surge in volatility.
And it’s not just stock volatility that is in the basement. Implied volatility for FB options is resting near all-time lows. Normally I’m a fan of selling premium but with option prices being so low, option-sellers aren’t really be compensated for the risk. Buying options seems to be the way to go here.
Buy the Apr $75 calls for $5.30. The maximum risk is limited to the initial $5.30 cost while the maximum reward is unlimited.
The expiration breakeven is $80.30, so with FB currently trading just above $79 we only need to see less than $1.50 rise by expiration to offset any time decay experienced along the way.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
