Get Paid to Catch the Facebook Inc (FB) Stock Knife

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Facebook Inc (NASDAQ:FB) has recently come under severe pressure, but through no fault of its own. FB stock is caught in a whirlwind trade — “The Trump Trade,” or TTT.

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Money is flowing out of recent stock stars and into laggards. Now, investors are chasing banks, biotechs, materials and industrials. The piggy bank for this chase has been mega-tech equities like Facebook stock.

Former favorites — such as Alphabet Inc (NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN) — have had full corrections in a few days. Even the mighty Netflix, Inc. (NASDAQ:NFLX) fell $20 per share off its recent highs.

TTT is most obvious in the Russell 2000 small-cap index, which finally reached a new all-time high. The small caps are somewhat sheltered from the effects of crashing mega-cap tech companies, so they reap the full benefits of the Trump reflation trade.

The moves have been neck-breaking.

The small caps went from a technical correction to new high in a week. Banks have rallied so hard that we have to refer to levels not seen for over a decade. This likely won’t continue at the same pace.

But while my initial reaction is to short small caps, instead, I believe in starting new longs in quality mega-caps like FB and GOOGL.

How to Trade FB Stock

Today, I want to initiate a cautious long in Facebook stock. I am not one to catch falling knives, but I do believe we can stabilize in the mid-term and find cautious levels against we can sell risk.

Bet #1: Sell the Jan $100 put for $1.25 per contract. By doing this, I am committing to buying FB stock at $100 per share, even if it falls below my mark through mid-January. This leaves me with a 13% buffer from current price and an 85% theoretical chance of success.

FB stock chart view 1
Click to Enlarge 
Usually I like to sell the opposite risk to hedge my bet. But in this case, I can’t justify selling upside risk after a correction like the one Facebook just had. So, I will delay such entry and watch for better entry points — perhaps after a nice bounce.

Since this trade is unhedged, I’d employ tight stops. I could buy cheap shorter-dated puts to guard against the disaster moment.

Bet #2: I only sell naked puts when I am willing and able to own the underlying stock at the strike sold. Otherwise, I can modify the trade here into a bullish put spread. This would be more conservative given that it has finite risk as a worst-case scenario.

Sell Jan $100/$97.5 credit put spread for 27 cents per contract. This leaves me with the same buffer and same theoretical chance of success as the initial trade. The difference here is that I have much less exposure to FB stock in case I am wrong. If successful, this trade yields 11% on money risked in a couple of months.

I am not required to hold these trades through expiration. I can close either for partial gains or losses at any time.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2016/11/facebook-inc-fb-stock-knife-iplace/.

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