When it comes to investing, consensus is that in the long term, stocks will be higher than today, and this is most true for the cream of the crop. So when I commit bullish for the long term, I usually do it for the industry leaders. These are usually mega caps, and today I focus on Facebook Inc (NASDAQ:FB).
Fundamentally, they don’t make gains this good and this fast often. FB stock burst onto the scene and was highly criticized at first, but has since silenced all the critics. It is almost impossible to see how this giant can falter in a way to completely change the rosy outlook that it currently has.
It’s hard to mess up that impressive user base, especially when Facebook has billions of eyeballs on its platform for hours each day.
In the beginning, management — like the stock — came under fire, but they have since proven that they can take the criticism and use it to fix mistakes by making bold, profitable moves.
Here they are, sitting on several assets with dominant positions in search and video, to name just two.
Click to Enlarge Technically this may not be an ideal entry point into the stock that has rallied 27% in 12 months, but deep dips have been fleeting so I can’t be too choosy. Today I want to set a bullish trade into next year, but since equity markets are near all-time highs, I want to do this with zero out-of-pocket expense.
FB Stock Trade Idea
The Trade: Sell the Facebook Jan 2018 $110 put and collect $1.75 per contract. I do this because I am willing and able to own FB stock at $110 if it falls below that level. I accept this risk knowing that anything below $108.25 per share would accrue losses for me.
Given that my risk has a 25% buffer from current price, I won’t sell opposing risk for balance. I am confident that I will be able to manage the risk against short-term price action. Furthermore and if this animal-spirited equity market persists, I could add a bullish call position for more potential profits.
The Juice (Optional): Buy the FB Aug $150/$155 debit call spread for $2 per contract. If Facebook stock rallies through my spread by August then I could double my money. But since I am offsetting the out-of-pocket expense by selling the puts, and if price stays above my $110 put sold, any premium I recapture from selling the calls would be pure profit.
I am not rushing into this tranche of the setup yet — not until some of the political shenanigans abate.
Learn how to generate income from options 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.