EDITOR’S NOTE: Sam Collins will return on Monday.
Today I want to reset similar risk for another run at capturing free money from Facebook stock.
Fundamentally, the FB story has been said in a million different ways. The bottom line is that it’s a money-making machine with daily billions of eyeballs on it for hours. It would take a real gaffe from management to ruin this machine.
Click to Enlarge The Snap Inc (NYSE:SNAP) public offering brought up some warnings of risk to FB stock’s dominance, but I don’t believe that they are even in the same league. In fact, it’s SNAP who needs to worry about Facebook’s threat to its very existence. The risk to SNAP stock comes from their own label of a camera company. I believe Facebook has its users trapped in their photo ecosystem. All Facebook users that I know store thousands of pictures on FB, so SNAP may have picked a fight with a gorilla.
Technically this may not be an obvious entry point to chase FB stock since it’s near all-time highs. So instead of chasing its price, I will use Facebook options to create a pair trade that will pay me to do that.
FB Stock Trade Idea
The Bet: Buy the FB Apr $145 call for 90 cents per contract. This is my maximum risk on this leg. I need Facebook to rally into my call before mid-April.
I said that the trade will make me money regardless. To do that, I will sell downside risk against FB’s longer term value.
The Bank: Sell the FB Sep $105 put for $1.20 per contract. This is a bullish trade that needs FB stock to stay above $105 per share to win. From current levels and with a 24% buffer, I stand a 90% theoretical chance of being right.
Taking the pair trade would give me a 30-cent net credit per contract. So even if FB goes nowhere and both legs expire worthless this trade would still be profitable. As long as price stays above $105 per share, any premium I capture from selling my calls would be pure profit.
I am not required to hold my options open through expiration. I can close either 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.
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