Late 2016, I wrote how to catch the Facebook Inc (NASDAQ:FB) knife. The trade was pure profits out of thin air. Since then, Facebook stock caught a 13% rally, but it still isn’t expensive. Let’s trade it again.
Fundamentally, FB execution has been flawless. It had doubters, but management proved them all wrong. After all, it would take a major gaffe to ruin the potential of a billion users.
Technically, while this is not an obvious short-term entry point, it should be a good point for a long-term trade. I am not looking to profit from this trade in the next few days. Instead, I am looking out to next year.
The Trade: Sell the FB Jan 2018 $100 put. This is a bullish trade for which I collect $4.50 per contract to open. To be successful, I need Facebook stock to stay above my sold strike while I hold the position open. Selling naked puts is risky and I only do it if I am willing and able to own FB stock at the strike sold. My breakeven price would be the strike price less the premium I collect. In this case, breakeven is $96 per share. If FB stock falls below my strike I could get assigned the stock. This means that I would own FB at a 21% discount from current levels. I also keep the premium I collect to open the trade. If I really want to juice this bullish trade, I can add a debit call setup for an even more bullish bias.
The Juice (optional): Buy the FB June $130/$135 debit call spread. This is a bullish trade for which I pay $2 per contract to open. I stand to double my money if FB rallies past my spread. Since we are in earnings season, I could delay entry in the debit call spread or keep it a small bet. Short-term reactions to earnings add a temporary gambling element. We never know how will traders react to the earnings regardless of how good they are. Usually those reactions, if unwarranted, are short-lived and the stock should resume its pre-earnings trajectory.
The Hedge (optional): Usually I like to sell credit call spreads to hedge my bet. In this case I am opting out. Instead of hedging, I can be less bullish by taking only one of the two trades suggested. Selling credit call spreads in this “animal spirit” market seems counterintuitive. The bulls are in complete control for now.
I am not required to hold options trades open until expiration. I can close them at any time for partial gains or losses.
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.
