One of the hidden benefits of boring, go-nowhere days like Tuesday is it makes it easier to spot stocks like Facebook Inc (FB), which are ramping despite the broader market’s sleepy mood. Compared to the flat close on the S&P 500, the 2% pop in FB stock is definitely an eyebrow-raiser and merits a closer look.
Since gapping lower in response to its late-October earnings announcement, FB stock has settled into a narrow trading range, as the actions of both bulls and bears have been in vain. It seems Facebook has become fond of the $75 level and is reticent to leave it behind.
And yet, if history has taught us anything about price behavior, it’s that stalemates never last. Tight consolidations in stock prices are virtually always followed by some type of breakout or volatility surge in one direction or the other.
And if Tuesday’s little stealth rally in FB is any indication, I suspect the coming resolution will be to the upside.
Due to the volatility lull that has descended on FB stock over the past month, its options have become quite cheap. In fact, the implied volatility of FB options sits at just the fifth percentile of its one-year range. The bargain volatility levels suggests a long option play is the way to go.
Options Trade on FB Stock
With its all-time high near $80 beckoning, FB could very well reclaim the $5 lost in its October post-earnings swoon. Those willing to bet on such an outcome should consider buying the Jan $75-$80 call spread for $2.05. The max risk is limited to the initial $2.05 and will be lost if FB falls below $75 by expiration. The max gain is limited to the distance between strikes minus the net debit, or $2.95, and will be captured if FB can climb back above $80.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.