After falling 15% from the Nov. 11 closing high of $109.01, shares of Facebook Inc (FB) bounced off the critical $92.50 support level and have rebounded somewhat, closing at $95.26.
The $92.50 area coincides with the 200-day moving average of $92.56, which should provide a further layer of near-term support. Implied volatility (IV) is also is at recent highs, which normally signifies a short-term low in share price.
Click to Enlarge With FB earnings due on Jan. 27, I look for Facebook stock price to trade above that support level until the earnings announcement. After earnings, however, is another matter, with FB stock poised for another leg lower.
Facebook stock is expected to show 68 cents of earnings on revenues of $5.36 billion, with the whisper number being 69 cents in EPS.
As always, guidance provided by the company during the conference call will be crucial. Other metrics, such as daily active users (DAU) and expenses will be closely scrutinized as well.
Even after the 15% drop in the stock from the all-time highs, Facebook stock is still the eighth largest U.S. company by market cap, in a virtual dead heat with Johnson and Johnson (JNJ) and Amazon.Com, Inc (AMZN). The valuation and size concerns I addressed in an earlier article still remain as well.
The 200-day moving average has not been pierced since July 2013, an extraordinarily long and extended run. A break of this crucial and widely followed indicator could lead to a sharp sell-off.
Click to Enlarge With the faith in both the market and momentum stocks like FB shaken since the beginning of the year, I think anything but a big beat by Facebook stock on earnings may lead to a swift move to the downside, especially given the technical backdrop.
To position for a sideways market until earnings, then a break of support post earnings, a dual put spread trade can be enacted.
HOLD $92.50 Support Until Earnings
First, a put credit spread is structured to profit from the expected $92.50 support level holding until earnings on Jan. 27. Specifically, the trade would be to sell the FB Jan 22 $92 put and buy the FB Jan 22 $90 put for a 30-cent net credit or better. These options expire this Friday, before earnings.
BREAK $92.50 Support Post Earnings
Simultaneously, a put debit spread is placed to profit from the expected break of the $92.50 support level in Facebook stock. The trade would be structured by buying the FB Jan 29 $92 put and selling the FB Jan 29 $90 put for 67 cents net debit or better.
Both spread trades can be entered as a combined trade for a 37-cent net debit, or $37 per spread. The maximum potential gain is $1.63, or $163 per spread.
The maximum potential return on risk is 440%.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
