Following an impressive 21% rally off the early February intraday low of $96.82 to the March 30 intraday high of $116.99, shares of Facebook Inc (FB) are looking exhausted.
Click to Enlarge The price action from March 30 tells the story, with Facebook stock opening higher than the all-time closing high of $116.14 set the previous day, only to close down the day with sharp selloff to $114.70.
This type of key reversal day often signifies a short-term top in stock, especially following a big rally like the most recent one in FB.
Facebook stock is also getting overbought on a nine-day RSI basis, with a reading well above the 75 level. The previous two instances when nine-day RSI exceeded 75 both marked short-term tops in the FB stock price. The failure of FB to break above the previous highs set in early February could very well mark a double top in the stock, also a bearish indicator.
With Facebook now valued as the fifth biggest U.S. stock by market cap, growth, simply owing to the law of large numbers, will be hard to come by. My previous post from Feb. 2 on FB delved into this, and nothing has materially changed since then.
Click to Enlarge To put Facebook’s valuation in perspective, it’s value is only 7% less than than that of The Coca-Cola Co (KO) and PepsiCo, Inc. (PEP) combined.
A quick revenue comparison from last quarter is shown below:
- Facebook (17.93B)
- Coca-Cola (44.29B)
- Pepsi (63.06B)
So shares of Facebook are valued at 93% the combined value of KO and PEP, but FB’s $17.9 billion in revenue only generates 17% of the 107.3 billion combined revenue of KO and PEP.
Yes, you can talk about margins and other metrics that favor FB, but those are certainly some big shoes to fill for a mega-cap company like Facebook. Plus, having the fifth largest U.S. stock trading at an 88 price-earnings multiple seems rather rich to me as well.
Facebook Stock Options
So to position for a consolidation in Facebook stock, I am looking to sell an out-of-the-money call spread just above the all-time intraday high of $117.59. With earnings due April 27, I want to have the options expire before then.
Specifically, I am selling the FB April 15 $118 calls and buying the FB April 15 $120 calls for a 18 cent net credit.
The maximum gain on the trade is $18 per spread, with the maximum risk of $182 per spread. Return on risk is 9.8%. I would close out the position on a meaningful move above the $117.59 all-time high level, while looking to keep the initial $18 credit if FB stock remains well-behaved and the spread expires worthless.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
