You’ll Like Buying Facebook Inc (FB) Stock at $138 for a Profit!

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As they say, the trend is your friend, but so are channel checks. As that relates to tech giant Facebook Inc (NASDAQ:FB) and its stock chart, an alternative reality where investors are less likely to like shares is entering the picture. Let me explain.

FB Stock: You'll Like Buying Facebook Inc (FB) Stock for a Profit!
Source: Shutterstock

It has been a nice run since FB stock forged a corrective move late last year on now obviously misplaced fears of what a Donald Trump administration would mean for the tech giant and its Silicon Valley compadres. Sorry, Jeff Gundlach and DoubleLine Asset Management.

But rather than think the coast is clear with shares up some 25% in four months while hitting fresh all-time-highs, maybe it’s time for a channel check of sorts in FB stock? This strategist likes to think so.

Bottom line, with Facebook sporting a massive market cap of $426 billion, solid but well-priced fundamentals and earnings in a week, it makes more than a bit of sense both off and on the price chart to make sure we know just how much we really like FB stock.

FB Stock Weekly Chart

Source: Charts by TradingView

Reviewing the Facebook stock weekly chart and it leaves little doubt the trend is up. Even during 2016’s late corrective activity, shares lost but 15% while maintaining the integrity of its uptrend of the past three years. Net, net, it goes without saying Facebook is one well-liked stock.

Having said that, Facebook does pull back once in a while and the current situation looks close to being one of those more rare occasions. They’re far from perfect, but the detailed “channel checks” and “channel supports” trend lines and FB’s Bollinger Bands, have done a reasonable job warning traders of imminent reversals in price.

Will this time prove different, with Facebook traders more resilient against the temptation of profit-taking or another corrective move? It’s possible, of course. Nevertheless, while trends can persist longer than thought possible, the current channel check does, more or less, emphasize that FB stock is a better pullback candidate than purchase.

FB Stock Modified Put Butterfly Spread

So, where would you like to buy FB stock? If you’re like me and appreciate the price chart, it’s at a discount to the current share price of $146.50, but still within the existing trend. One way in which Facebook options traders can do this today is with a modified long put butterfly.

Reviewing the FB puts, the Weeklys 12 May $140/$138/$135 put butterfly is priced for even money to maybe a debit of 5 cents.

Regular long butterflies cost money due to the matching widths of the embedded verticals. But with a modified version like this one where the sold $138/$135 put spread is slightly wider, it’s possible to execute for free or even a credit.

Assuming a no-cost spread purchase, if shares of Facebook fall by less than 4.4% or below $140, at expiration the spread goes out worthless. This amounts to a no harm, no foul situation as the position didn’t cost anything to enter. Of course, if shares of FB are down by let’s say 3%, the trader can always decide if he or she wishes to purchase the stock.

Should shares of Facebook manage to drop by 5.8% to $138 into expiration the trader will be in position to realize a profit of $2. This is the result of the owned $140/$138 bear put spread expanding to its maximum value, while the sold (and wider) bull put spread expires worthless.

If shares of Facebook get really “unliked” by investors, the break-even on this butterfly is $136 or 7.1% below today’s price. Below $136 and losses begin to accrue. The good news is a loss of $1 per spread with shares below $135 is as bad as it gets. Of course, if you still like the FB stock story, buying on weakness like that, or even uglier price action, just got a whole lot friendlier to consider.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/facebook-inc-fb-stock-profit/.

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