Much ado has been made about the so-called FANG stocks — Facebook Inc (FB), Amazon.com, Inc. (AMZN), Netflix Inc. (NFLX) and Alphabet Inc (GOOG, GOOGL) — in the financial media in 2016. Many were writing FANG tech off as big losers for the year, even though the dust hadn’t even settled on January’s trading.
While the group has mounted a comeback in recent weeks, some members are more worthy of your trading attention than others. In fact, the best opportunity of the group may be FB stock.
Click to Enlarge FB stock has beat a solid path higher since hitting lows in early February and is now trading north of all of its major short-term and intermediate-term moving averages and is poised to take out significant psychological and technical resistance at $110.
FB stock also has solid backing within the brokerage community. According to Thomson/First Call, Facebook has attracted a whopping 48 buy ratings, compared to just three holds and one sell rating. Furthermore, the 12-month price target has risen during the past two months to perch at $135 per share — up from $125 per share in December. The current target implies an upside of over 23% for FB stock over the next 12 months.
Options traders are also firmly in FB’s corner. Currently, the March/April put call open interest ratio comes in at 0.66, with calls nearly doubling puts among short-term options. Overall, April implieds are pricing in a potential move of about 7.4% for FB stock. This places the upper bound at about $118, while the lower bound lies near $100.
2 Trades for FB Stock
Call Spread: The most obvious way for options traders to take advantage of continued strength in FB stock is to buy calls, or call spreads. Spreads help limit your risk while lowering your potential payout, but given the recent market volatility, a March $110/$115 offers considerable profit potential.
At last check, the March $110/$115 spread was offered at $1.60, or $160 per pair of contracts. Breakeven lies at $111.60, while a maximum profit of $3.40, or $340 per pair of contracts, is possible if FB stock closes at or above $115 when March options expire in two weeks.
Married Put: Options are not for speculation alone, however. By using a strategy called a “married put,” stock traders can utilize FB stock options as pseudo insurance policy when opening up a new stock position.
A married put involves purchasing an at-the-money or out-of-the-money FB put for every 100 shares purchased. The strike of the purchased put should reflect your risk tolerance – i.e., an at-the-money $109 put offers full protection, with losses limited to the cost of the put and brokerage fees, while an out-of-the-money $100 put would allow for FB stock to test support before the insurance kicked in.
With the market being what it is, a FB April $100 married put may be the way to go. In this trade you would buy 100 shares of FB stock (currently trading for about $109-$110 per share) while simultaneously purchasing one April $100 put, which, at last check, was asked for $1.24, or $124 per contract.
In the end, the total cost for your option position would be $124, while the stock position would total about $11,000 — excluding brokerage fees. If FB stock closes below $100 per share when April options expire, you would be able to exit the position and avoid any additional losses by exercising the April $100 put. Finally, if FB stock holds above $100 through April expiration, you can roll the $100 put forward (or upward to $105) into May or June if you feel you still need the protection.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
