After hitting a fresh all-time high and threatening to challenge $130 in the wake of a better-than-expected earnings report, Facebook Inc (NASDAQ:FB) stock has settled into a trading range near $125.
Headwinds in the broader market have provided additional resistance, but once the stock has settled and profit taking has shaken out, FB stock should resume its upward trend once again. And options traders are looking at a potential opportunity.
Technically, FB is in a basing period following a sizeable earnings-driven bump. A sell-on-the-news effect pulled FB stock back to $125 in the wake of strong second-quarter growth, and the shares have spent the better part of the past week consolidating in the region.
Facebook’s 10-day moving average — below which FB stock has not closed a session since July 5 — has also caught up the shares, providing a potential springboard for a move higher.
Sentiment is only a minor concern for FB stock traders. For instance, Thomson/First Call reports that Facebook has acquired 44 buy ratings, compared to just three holds and one sell rating and the 12-month price target of $153.98 represents a healthy premium of about 23%.
While this may be an issue for some contrarian investors, optimism on outperforming stocks is to be expected, and barring any misfires from Facebook, there is very little risk of downgrades or price-target cuts.
Click to Enlarge Turning toward the options pits, calls are gaining in popularity for FB stock. Currently, the August/September put/call open interest ratio rests at 0.65, with calls on the verge of doubling puts among options set to expire within the next two months.
Implieds are a bit on the high side, though, with September options pricing in a move of 4.5% even though there are no major events scheduled ahead of expiration. As a result, the upper bound of the expected move lies at $130.70, while the lower bound lies near $119.30 — though this lower rail is likely closer to $120, given technical support in the area.
2 Trades for FB Stock
Call Spread: With FB stock set to trend higher following its recent basing period, options traders might want to consider a Sept $125/$130 bull call spread. At last check, this spread was offered at $1.80, or $180 per pair of contracts. Breakeven lies at $126.80, while a maximum profit of $3.20, or $320 per pair of contracts, is possible if FB stock closes at or above $130 when September options expire.
Put Sell: For a more neutral-to-bullish outlook — i.e., for those traders who are expecting FB stock to maintain its current holding pattern for a while longer — an FB put sell may be just what you are looking for. At last check, the Aug 19 series $120 put was bid at 19 cents, or $19 per set of contracts.
As long as Facebook stock trades above $120 through expiration next Friday, traders pursuing this strategy will keep the $19 premium. However, if FB trades below $120 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $120 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
