Use Puts to Profit From Declining FANG Stocks

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With the crash of LinkedIn (LNKD) the other day, the bubble stocks may have just seen the last of their good days. The FANG stocks, so named by Jim Cramer, but which I think don’t encompass the entire universe of insanely overvalued names, are going to see some major declines going forward.

Use Puts to Profit From Declining FANG Stocks

My theory is that institutions buy these stocks, then they move and attract momentum traders. Then “Joe Investor” jumps in and more momentum traders follow suit.

However, once any sign of weakness appears, the momentum traders get out. That starts the big decline, and the institutions and retail investors cut bait.

I think you can make money going short the FANG stocks, but that may entail too much risk for some investors. Instead, you can use puts to benefit if certain FANG stocks — or others — fall enough to make buying the puts worthwhile.

FANG Stock Puts: Netflix, Inc. (NFLX)

FANG Stock Puts: Netflix, Inc. (NFLX)I think Netflix (NFLX) will have its day of reckoning. It has already lost about a third of its value, but I think there’s more to go.

Firstly, Netflix is burning cash — $500 million in the last year — and makes little actual profit. One thing that happens when momentum stocks crash is that the metrics that used to matter, stop mattering. In this case, Netflix subscribers are less and less of a concern to shareholders.

The way to play the FANG puts is to buy near-term in-the-money puts. That way, you don’t get hit with big-time premiums.

The March 4 $100 puts can be bought for $12.90. So if NFLX falls below $87.10 (it’s at $88.45 right now), you make money.

Then, regardless of where the stock is, you will close out that position on or before expiration, and then open a new position about three to four weeks out. That maintains your synthetic short.

FANG Stock Puts: Facebook Inc (FB)

FANG Stock Puts: Facebook Inc (FB)Facebook (FB) is another disaster waiting to happen.

FB is nothing more than a pure-play digital advertiser that will has a fight cut out for it for market share. Advertising budgets have always been finite and in a pretty tight historical range.

A close look at Facebook’s 10-K also shows that it’s actually rather difficult to determine just how many users are active on the platform. Ultimately, Facebook does not solve a problem, so it will be difficult to maintain as a long-term business as anything other than an advertiser.

I think Facebook can fall from its $101 price. It’s fair value is probably closer to $20. You can buy near-term in-the-money puts for the same strategy as with NFLX. The March 11 $110 puts can be bought for $10.30, so you break-even if FB hits $99.70.

Again, regardless of price, you can maintain the synthetic short position by selling the puts at any time and just buying the same one again for the next month out.

FANG Stock Puts: Apple Inc. (AAPL)

FANG Stock Puts: Apple Inc. (AAPL)Apple (AAPL), while not technically a FANG stock, is still a Big Tech name. Apple probably has less distance to fall than the others, but the company is actually struggling for a change, and I think there’s some modest downside to be had.

Although AAPL has tons of cash, much of it is parked overseas and can’t really be invested or distributed. That’s the problem with the high U.S. corporate tax rate.

Also, it seems increasingly reliant on the iPhone to make its profits. That creates vulnerability. Apple stock is at $94.27, and while I think there isn’t much downside to be had, we are in a bear market. That could trigger a big selloff that takes AAPL down further.

The weekly March 11 $105 puts can be bought for $11. That means you will break even at only $94. Likewise, the puts can be sold and others that are further out be purchased in its place.

As of this writing, Lawrence Meyers was short NFLX and the FDN ETF, which holds the FANG stocks in its portfolio.


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/puts-fang-stocks/.

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