While the entire trading world waits on the all-important Brexit decision, Facebook Inc (FB) has been waiting and consolidating ever since breaking the $116 support level.
Click to Enlarge Things have gotten rather quiet in Facebook stock — from my contrarian perspective, too quiet. I look for Facebook to break out over the coming weeks, and with FB stock options dirt cheap, it won’t take much to get the options moving.
As the chart shows, Facebook stock has been mired in a very tight trading range since breaking the critical $116 support level on June 13. The past seven days have seen FB remain in a very tight range between $113 and $115.
Historic volatility (HV), which measures the actual range and movement of Facebook stock, is trading at only the 6% percentile. Implied volatility (IV), which is based on the options market view, is trading at only the 17% percentile.
So FB is getting eerily quiet from a stock perspective and very cheap from an option perspective.
Click to Enlarge To take a look at just how cheap the options have become, I pulled off the prices from February 2 and also from yesterday. With FB stock trading at virtually the same price ($114.61 on Feb. 2 and $114.38 yesterday) and with both of these periods post-earnings, a comparison of the strangle prices shows just how cheap the options have become.
Click to Enlarge An option strangle is simply an out-of-the-money call and an out-of-the-money put. In this case, I examined the $115 call and the $113 put with 24 days until expiration.
On Feb., the FB strangle was priced at $6.55, which equated to 5.7% of the price of Facebook stock at that time. Yesterday, the same strangle was priced at only $4.38, or only 3.8% of the price of Facebook stock.
So with FB trading at nearly the same price yesterday as it was on Feb. 2, the strangle price has dropped by $2.17, or roughly 33%. To me, it makes probabilistic sense to go long the FB option strangle to position to profit from a breakout of the recent doldrums in Facebook stock.
FB Stock Trade Idea
Buy July $115 calls and simultaneously buy the July $113 puts for a $3.95 net debit. These are regular monthly options that expire July 15.
Since this trade is long option premium, time decay is a decided negative.
I would look to revisit the trade after the Fourth of July and close out of half of the position if FB stock is still mired in the recent range.
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.
