Most equity traders chase price targets, but timing a price level can be tricky. I prefer not to chase single set points on a chart. In fact, avoiding this has provided me with great success creating income from Facebook Inc (NASDAQ:FB) — all without any out-of-pocket risk.
Most recently, I sold a short-term iron condor that expired Friday for maximum gains and yielded over 30%. Last month, I delivered more profits on FB stock from a long trade.
Today, I want to reload with another trade — this one shorter, and therefore most suitable for nimble trader. This Facebook options trade won’t be an exact iron condor, like my last trade, though. Given the current open interest, I couldn’t find short-term support levels worthy of my risk.
Click to Enlarge Technical analysts will point to the fact that FB stock is at the upper end of the weekly channel, and thus it’s time to fade it. Fundamental investors will argue over whether Facebook shares are undervalued or overvalued by plus-or-minus 10%. There are also fundamental worries over the “fake news” issue and metric accuracy.
But boy, is there definite potential when you have the daily engagement issues of more than a billion users.
Guess what? I say they’re all correct. I’m confident that in the next few months, all sides will be proven correct in one way or another.
Today, my trade structure sells short-term risk against ranges in Facebook stock, leaving room for error on either side of the bull and bear arguments.
How to Trade FB Stock Now
The Short Side: Sell the FB 7 Apr 144/$145 credit call spread (weekly). This is a bearish trade that has an 80% theoretical chance of success to yield 22% on risk.
I typically like to sell exactly opposing risk. That minimizes margin requirement and reduces the dollars at risk. But today, I’m going to stagger the timing instead so I don’t have to be so close to the current price. With such a low-volatility environment in play, Facebook’s options premiums are deflated.
The Long Side: Sell the FB Apr $138/$137 credit put spread (monthly). This is a bullish trade that has a 85% theoretical chance of yielding 17% on money risked.
What this essentially means is that we want FB stock to stay under $144 through April 7, and hold above $138 through April 14. If that happens, both credit spreads would expire for maximum gains.
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.
