Positive comments out of a JPMorgan analyst ignited a much-needed rally out of Facebook Inc (NASDAQ:FB) yesterday. FB stock scored one of its largest up days in months by climbing 3.7%.
Given the size of the move and the accompanying high volume, Thursday’s pop might as well have been an earnings gap.
Let’s dig in to Facebook’s recent price action to bring context to the recent rally and see if there’s a way to profit from FB stock’s sudden surge.
Following last month’s earnings announcement, the bears have been in full control driving shares of FB down as much as 9%. While this wasn’t the first time the stock has suffered a high-digit decline, it is the first time it’s descended enough to test its 200-day moving average.
Ever since FB began its glorious ascent in mid-2013 the buying pressure has been sufficient to keep the stock propped well above this long-term average. With the stock at risk of tumbling below the 200-day Thursday’s rally arrived just in the nick of time.
What’s particularly impressive about the rise is its ability to vault above short-term resistance and both the 20-and 50-day moving averages in one fell swoop.
Obviously time will tell if the surge was a one-day wonder, but given how quickly it reversed the recent damage in FB I suspect we see some follow through.
‘Like’ FB Stock with this Call Spread
Due to the post-earnings volatility crush, option premiums sit at their lowest levels all year. As a result long option plays are an attractive way to capitalize on continued upside in FB.
Buy the Jul $80/$85 call spread for $2.25.
The maximum risk is limited to the initial $2.25 debit and will be lost if FB slips back below $80 by expiration. The maximum reward is limited to the distance between strikes minus the net debit, or $2.75, and will be captured if FB can rally above $85 by expiration.
If you can afford to incur the maximum loss then you needn’t fuss with a stop loss. Since the cheapness of the call spread already limits the loss you can let the trade ride giving Facebook a wide berth to travel whatever path it wants to the $85 level.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
