Shares of Facebook Inc (FB) stock closed Friday at $97.54, having rallied 12.54% off the Sept. 29 lows and 34.3% over the past year. Facebook’s stock price is now looking to challenge the July 21 all-time high of $99.24, which may be the impetus for a move to the $100 level.
While the recent rip higher has certainly been impressive from a momentum standpoint, it may be a prudent time for investors to consider patience before adding Facebook stock at these levels as well.
FB is now the seventh-largest stock by market capitalization in the U.S., passing such iconic names as Coca-Cola (KO) and Johnson & Johnson (JNJ). Earnings are due out Nov. 4 after the close, with consensus estimates of 35 cents per share, which would leave Facebook stock sporting a very lofty current P/E multiple of 99. While FB certainly continues to grow, with an estimated 1.5 billion daily users, the law of large numbers is certainly going to start to temper growth rates. Monetizing the legions of Facebook users is also an ongoing challenge, as revenues fell short in Q2.
Technically, Facebook stock is at a critical juncture, with FB having broken through the 50-day moving average at $91.84. The 200-day MA hasn’t been breached since late July of 2013, so the rally may be getting extended.
A breakout to new highs may lead to a sharp technical and short-covering rally, while a failure at the levels would put in a classic double-top formation. Which way it will play out is anyone’s guess, but here are bullish and bearish option calendar spread strategies that will position you for a breakout (bullish) or a breakdown (bearish) in Facebook stock.
Bullish call calendar spread: Buy FB Nov $100 call and sell FB Oct 30 $100 call for a $2.15 net debit
Bearish put calendar spread: Buy FB Nov $95 put and sell FB Oct 30 $95 put for a $2.15 net debit
Both spreads are defined-risk trades, with maximum loss limited to the net debit paid of $2.15. The short options expire Oct. 30, before earnings, while the long options expire Nov 20, after earnings. The maximum gain for the trade is if Facebook stock closes at the strike price at October expiration ($100 for the bullish call calendar, $95 for the bearish put calendar). There are also two subsequent weeks after Oct 30 expiration to sell additional option premium against the long position if warranted.
Aggressive traders may want to hold the long position uncovered into earnings, while more conservative traders may want to exit before earnings on Nov 4.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities.
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