They say the trend is your friend. But with some investors unfriending Facebook Inc (NASDAQ:FB) in recent days, getting chummy with FB stock is more likable using Facebook options and a modified fence strategy. Let me explain.
Investors have begun to show a wee bit more disdain for many larger-capitalization tech names over the past week. And as much as you might like Facebook the company, FB stock is going along for the ride, and it could get slightly messy.
What’s behind the sudden and relative disliking of FB stock? If it’s headline support you’re after, good luck finding any. But it should be easy enough to appreciate Facebook’s modest weakness (thus far) stemming from an overdue rotation in the market.
Bottom line and in this case, also appreciating the squiggly line on the FB stock chart, after months of outperformance and hitting fresh all-time highs while other sectors and stocks seem stuck in circa 2008–2009, it’s hard to blame algorithms and larger investors for finally taking notice.
So while you can love your Facebook and the long-term investment narrative, in the here and now, it’s a less-than-ideal time to buy FB stock. But, as I’ll explain, that’s not to say you can’t position today either.
FB Stock Weekly Chart
Looking at the FB stock weekly chart and there’s little doubt investors have liked shares for a very long time. But the trendy behavior of higher-highs and higher-lows governed by a long-standing up-channel is now in a tenuous position which opens itself up to corrective activity.
Over the past couple years when FB has rallied into channel resistance as reflected by our “channel checks” notations, shares have consistently retreated and established minor corrections. There’s little to make me believe this time will prove any different.
In fact, this belief is reinforced because Facebook shares have shown a bit more vigor in jumping above the resistance line in recent weeks and are now flirting with a price breakdown from a bearish slanted triple top pattern.
FB Stock Modified Bullish Fence Spread
Last time I wrote about FB stock in late May, a bullish modified fence strategy for 25 cents was introduced to readers. Time and price went on to establish perfect alignment as Facebook shares rallied just enough to put the embedded bull call spread fully in-the-money to realize a profit capture of $2.25 or 900% in one month.
Currently and after reviewing Facebook’s options, I still like this strategy. This time around though, packaging a short Aug $135/$130 put spread with a purchased Aug $165/$170 bull call vertical for up to even money is favored.
What does this spread combination offer bullish traders? On the downside, risk is limited to $5 below $130 in FB stock. Coupled with a margin of safety of 9% down to $135 before breaking even on an expiration basis, the strategy allows traders to be in position to buy a corrective pullback with complete risk control.
The limited risk of this position also means in the event of a much larger correction below the put spread, a trader’s effective purchase price in FB stock, if they’re looking to buy shares, could be substantially lower as well. And with earnings later this month, that’s not something to disregard.
Between the $135 and $165 prices, both spreads expire worthless at expiration. However, as the strategy is priced for no cost, there’s no loss either. What’s more, as the combination is long deltas, if Facebook rallies during the life of the position, profits could very well begin to accrue as FB stock trades within this price range.
Finally, if my current technical outlook is really wrong and FB stock rallies to new highs, the trader owns a free $165/$170 bull call spread. I don’t know about you, but I’d rather be wrong on the price forecast and more profitable by as much as $5 in the trading account any day of the week.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.
