There are times to “like” Facebook Inc (FB) stock and there are those instances when it pays to be a bit less optimistic. And right now, Facebook is looking ripe for a bear put spread, as I’ll explain below.
Why am I bearish on Facebook stock (again), one of the market’s most sacred cows? For starters, there’s Facebook stock’s high multiple price tag and dizzying market capitalization.
I’ll pose the question: if nobody “checked in” to Facebook for a month, would the world stop spinning or would it pose a meaningful problem for 99% of us? Not likely.
I honestly can’t say the same about any of the other mega-cap technology stocks like Alphabet Inc (GOOG, GOOGL), Amazon.com, Inc (AMZN), Microsoft Corporation (MSFT) or Apple Inc. (AAPL). And for me, that’s a concern.
I appreciated that, according to our bovine friends, Facebook is expanding its business reach and becoming ubiquitous with all things growth — and therefore FB stock is worth the price.
Nonetheless, even were that true and even if Facebook captures the longer-term growth potential to chip away at its sky-high price-to-earnings ratio, Facebook stock is still at risk in the short term.
Multiple contraction — or what an investor isn’t willing to pay for a stock like Facebook — occurs during overdue, leaner and less optimistic “risk off” conditions.
Given a market that’s quickly become historically expensive (again) over the last few weeks, that’s what Facebook stock is increasingly facing. And that opinion, mind you, is showing up with even greater authority on Facebook stock’s price chart.
Facebook Stock Daily Chart
Aside from Facebook’s recent double top pattern, there’s been solid bearish secondary confirmation for lower prices in FB all along the way.
Of late, Facebook stock has demonstrated relative weakness compared to the broader market. That’s probably not a good sign, but also not the final word.
What speaks literally volumes to us is Facebook stock’s ominous investor participation trends, which have left warnings for the past couple months that all is not well with FB.
Looking at Facebook stock’s volume action, it’s quite clear bears have control of FB with multiple days of distribution showing up — and that bulls haven’t been aggressive buyers for quite some time.
And given Wednesday’s ultra-volatile, “nearly” and “almost” crowning outside day for bears, the proverbial canary in the coalmine is chirping that Facebook stock’s multiple contraction could be underway.
Facebook Stock Long Bear Put Strategy
For like-minded traders not liking Facebook stock’s prospects, the May $110 / $100 bear put spread for up to $4 is attractive if FB trades back below $108.50 and its 50-day simple moving average support.
With shares near $110, the spread fetches $3.50. However, given Facebook stock’s late-day reversal, waiting for the modest bit of technical confirmation detailed above is advised and, in our opinion, worth the extra cost.
On an expiration basis, this vertical requires FB to decline by about 3.5% and below $106 to begin turning a profit. Having said that, prior to that day, this spread can accrue profits immediately if FB trades lower, as it maintains a soft, but negative delta of 27.
What’s more, should Facebook stock decline below $100, at expiration the spread would provide a return of 150%, or $6, in just a handful of weeks.
Limited risk and the ability to cut down on possibly unwanted options factors such as time decay and volatility risk are also nice features of a spread position like this FB stock vertical.
And bottom line, with Facebook earnings set for late April, I know I “like” spreads like this vertical a whole lot more!
Investment accounts under Christopher Tyler’s management currently own positions in FB. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
