Facebook Inc (NASDAQ:FB) has a long and bright future ahead. It’s a fact you can easily see from the social media giant’s fundamentals and FB stock’s outperformance of the market as a whole.
The market’s current bull run is getting a bit long in the tooth, however, and many analysts are beginning to worry that stocks are over inflated. The Federal Reserve’s current course of interest rate hikes backs this concern.
Furthermore, the lackluster Snap Inc (NASDAQ:SNAP) IPO has put a strain on social media investors, creating additional discontent in the sector. As such, I believe it’s time for traders to prepare for short-term risk when it comes to Facebook shares.
Click to Enlarge Technically speaking, the risk factors are readily apparent. FB is currently trading in overbought territory, having outstripped support at its 50-day moving average by a wide margin. Furthermore, short-term resistance at $140 is mounting, and a rejection here could be the catalyst for a wave of short-term profit-taking.
While a full-blown retreat may not be in the cards — barring a significant correction in the broader market, that is — it’s reasonable to assume that a pullback to support at the 20-day moving average is not out of the question at this point.
A breach of Facebook’s 10-day would certainly be a signal that such a short-term pullback is in the cards.
Turning to the sentiment backdrop for FB stock, there is plenty of room for adjustments that could spark such a short-term retreat. For instance, Thomson/First Call reports that none of the 49 analysts following Facebook rate the shares a “sell,” with only about five doling out “hold” or “underperform” ratings.
FB options traders are also a bit overly short-term bullish. Currently, the April put/call open interest ratio comes in at 0.32, with calls more than tripling puts among options set to expire within the next month. This bullish outlook isn’t necessarily a negative for FB stock, but it does show that short-term traders are largely unprepared for a potential pullback, which could exacerbate any downside move.
Overall, April implieds are pricing in a potential move of about a 4.2% for Facebook shares. This places the upper bound at about $145.90, while the lower bound lies at $134.10.
2 Trades for FB Stock
Put Sell: The safest way to take advantage of any short-term weakness in FB stock, assuming you are not completely bearish on the shares, is to sell out-of-the-money premium and bank on technical support. Traders interested in such a strategy might consider an April $130 put sell position. At last check, this put was bid at 52 cents, or $52 per pair of contracts.
As long as Facebook stock trades above $130 through expiration, traders pursuing this strategy will keep the $52 premium. If FB trades below $130 ahead of expiration, however, you could be assigned 100 shares for each contract sold at a price of $130 per share.
Bear Put Spread: On the other hand, with anxiety rising in the broader market, and FB stock trading in overbought territory, the decline could be worse than expected. Those looking to take advantage of such a correction might want to consider an April $135/$140 bear put spread.
At last check, this spread was offered at $1.74, or $174 per pair of contracts. Breakeven lies at $138.26, while a maximum profit of $3.26, or $326 per pair of contracts, is possible if FB stock closes at or below $135 when April options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
