In April, mega caps caught fire and stocks like Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN) set new all-time highs on a daily basis. Facebook Inc (NASDAQ:FB) initially went along with the breakout but has since stalled.
I say this while biting my tongue, because only in this uber-bullish equity environment does four days without a new all-time high qualify as a stall. FB stock is merely 2% off its five-day-old high.
Nevertheless, stalling at highs for no apparent reason is often a warning sign especially when similar stocks continue to rally. Facebook’s relative underperformance is a negative omen and thereby encourages lack of interest and perhaps profit-taking.
Luckily, using options I can still find ways to profit regardless of levels as I’ve recently shared a FB trade that delivered easy profits with no money out-of-pocket. These tend to be available regardless of price but the trick is to find value levels where support has been already proven. In essence I sell risk where I think buyers would step in to buy FB stock.
Click to Enlarge Alternatively, I would either need to wait for a pullback that may be long time coming, or risk $150 to buy the stock and leave no room for error.
This is especially risky given that markets in general are long in the tooth and at all-time highs. By using options instead of buying the equity I virtually eliminate the need to be surgical in my entry and exit points.
The Bet: Sell the FB Aug $125 put and collect 90 cents per contract. This is a bullish trade that requires price to stay above the sold risk to win. With a 16% price buffer, I have a 90% theoretical chance that I will retain the whole premium for maximum gains. Anything below $124.10 would accrue losses for me.
Another way to look at this is that you are collecting a premium for the opportunity to own FB stock at a 16% discount. If you’re not willing or able to own Facebook stock at the strike price, however, then you shouldn’t sell naked puts.
Instead, I would turn this setup into a credit put spread where the maximum damage is limited yet can still yield 6%. Compare this with needing to risk over $150 per share and hoping FB stock rallies 6% through August.
E-mail sellspreads@gmail.com with questions or join me to learn more about options in a personal 1on1 webinar 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.
