You may “like” Facebook Inc (FB) a lot and fully appreciate its utility for its individual users. But for investors, now is the time to “unlike” Facebook stock with a bear put spread.
Let me explain.
For the record, this strategist is fully aware FB is one of those sacred cows for many investors. Personally, I’ve “liked” Facebook stock a good deal over the past year.
My last analysis back in mid-November laid out the case for Facebook stock and what went on to become a very profitable, below-market bull put spread while market and stock conditions still warranted being somewhat bullish on shares of FB.
Unfortunately, that’s not the currently reality for Facebook stock.
The fact of the matter is that overall stressed market conditions are not the type of environment to be liking an expensive name like Facebook stock, one of last year’s best large-cap performers.
What’s more, given FB’s bearish pattern development, Facebook stock is an opportune candidate for a bearish options strategy.
Facebook Stock Daily Chart
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Unfortunately, a subsequent two-month lateral consolidation led to an eventual downside test of its 200-day simple moving average during January’s bearish turn in the market.
Currently, FB stock is still above its 200-DSMA and off by a very modest 3% year-to-date. The performance is much stronger than the overall market on both counts, but don’t get too excited.
In our estimation, Facebook’s relative strength means a good deal less than it would in a healthy, uptrending market.
It’s our view that, given the market’s weakened state, it’s much more important to concentrate on Facebook’s bear flag pattern that’s developed into overhead resistance and use the FB price action as a shorting opportunity.
FB Stock Long Bear Put Strategy
For like-minded bearish traders not liking Facebook stock’s prospects, the March $97.5 / $87.5 bear put spread for up to $2.25 is attractive in conjunction with some money management.
The out-of-the-money vertical requires about 14% of downside in Facebook stock at expiration to maximize the spread’s full profit potential of $7.75 and return of 300%.
It’s a nice return on this FB vertical, but does emphasize the need for some bearish movement in Facebook stock.
To break even at expiration, a move lower of roughly 6% in Facebook stock to $95.25 is needed. However, profits could begin building immediately, should shares of FB weaken in the interim.
Lastly, while this Facebook stock vertical allows for a nice reward-to-risk profile and is limited risk, the time decay and volatility risk, while reduced, are significant enough as to warrant a stop loss should market conditions turn bullish for more than a day or two.
Investment accounts under Christopher Tyler’s management currently own positions in FB or its derivatives 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.
