Facebook Inc (NYSE:FB) is a mega cap with a great story to tell. Its platforms demand the daily attention of more than a billion users, and there’s still plenty of potential left. Although Facebook stock recently sold off from its all-time high, it’s still within ear shot, so entering near these highs is fraught with danger. That doesn’t mean stay out of FB stock.
I recently shared a winning trade that created income from selling the range in FB stock. But for the long term, I usually like less active trades.
That means that I would rather sell risk far beyond current prices, so I don’t have to tend to it minute to minute.
While FB fundamentals are undeniably strong, the chart looks a little tired here. FB recently reached the potential we identified back in February and is now fading. Though not a disaster yet, risking $141 per share here and ahead of the earnings is reckless.
Instead, I will use Facebook options to fashion trades that allow a hefty margin of error.
The Bet: Sell the FB Dec $125 naked put for $5 per contract. This is a bullish trade that has an 80% theoretical chance of success, which means that Facebook stock stays above my strike sold. Else, I would be put the stock and anything below $120 per share would accrue losses for me.
Usually I like to sell opposing risk for balance. But in this case, I will take a small bearish position to try and capture a dip in the stock. I consider this a rental that I can sell back if FB finds footing and resumes higher. Else I can leave it as a lotto play on earnings. Like all lotto trades, I keep it small, so that overall I retain a nice credit on this pair trade.
The Hedge (Optional): Buy the FB May $140/$135 debit put spread for $1.50 per contract. This would capture any technical moves off or into the earnings.
Shorting Facebook stock with this spread is not a knock on the fundamental story, but an attempt at gaming the price action. The aforementioned hedge spread is optional and temporary. It does not detract from the goal of going long FB by selling downside risk.
Learn options as easy as 1-2-3 here. 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.
