After taxiing on the runway for seemingly ever, Facebook (FB) has finally taken flight.
The social media darling soared yesterday climbing 3.7%. Given its sleepy demeanor of late, that’s a bigger move than you may think.
FB stock first tagged $79 last September and has clung to it ever since. Suffice it to say this week’s breakout has been months in the making and onlookers should be cheering Facebook’s newfound strength.
With its long and winding trading range now in the rear-view mirror Facebook has nothing but blue skies ahead.
Facebook Stock Replacement Strategy
Now that FB stock price is once again perched at an all-time high, shareholders may be looking to harvest some gains. Investors willing to add options into the mix could consider the stock replacement strategy. The tactic consists of swapping out your long stock position with long call options. Since the call options can be purchased for much less than the long stock it drastically reduces the amount of capital — and therefore risk — in the trade.
What makes the strategy particularly attractive is that FB stock options are being offered on the cheap right now. Let’s say you own 100 shares of FB. With the stock at $88.65 your position value is $8,865. To reduce risk as well as potentially lock in gains you could sell the stock and replace it with a long Jan 2016 $70 call for about $20.
The new long call trade would move almost dollar for dollar with FB stock, effectively replicating your long stock position. At $2,000 ($20 x 100) the capital requirement for the call option is only about a quarter of what you had committed in the stock position. Instead of having $8,865 at risk you now only have $2,000.
Because the call option is deep in the money it possesses little extrinsic value so time decay won’t be that big of a factor in the new position. With a January expiration the call option allows you to participate in further FB upside for another 205 days.
For spectators wondering if now is a good time to jump aboard FB stock, I suggest waiting. It’s up 10% over the past two weeks and quite overbought. A pullback in the coming days will provide a lower risk entry.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
