On Monday, equity traders were selling Facebook Inc (FB), almost certainly to buy Apple Inc. (AAPL). This was on a headline that Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) bought AAPL shares for the first time.
As a result, Apple spiked 3.5% while money poured out of FANG stocks, including a 2% decline for FB stock.
However, current fundamentals suggest that Facebook stock is a lot more exciting to own than Apple. FB has proven that it can successfully enter new ventures. Some are already big hits, and Facebook has more in the pipeline for even more promising venues for future growth. It’s a leader in mobile, and it’s making strong headway in video.
AAPL? It’s stagnating, with many of its newer ideas failing to achieve any sort of explosive momentum, and its workhorse, the iPhone, is now in decline.
Click to Enlarge The last time I wrote about Facebook was a suggestion to go long FB stock when it was down 10% on the year. That trade was an easy win, with shares now up 13% in 2016.
Admittedly, right now is not the most ideal time to go long Facebook shares, but given how resilient the broader market has been, I’m willing to nibble long, even at these high levels.
Also, there are no bears in sight. There has been no selling pressure of late, and most red days have come from bulls booking profits.
How to Trade FB Stock
I can structure a long trade on Facebook with a decent yield, but it will require the broader market to not correct. Rather than risking money buying FB stock, I want to use the options market to generate income via selling spreads. In this case, I will also buy calls for an even bigger bet on FB upside potential.
Options are time-sensitive so here I want to give myself time to be correct. Also, longer-dated option trades are often easier to manage should price move against them.
Trade #1: Sell the FB Jan $90 puts. This is a bullish trade for which I collect $2.85 per contract. This opens the downside risk if FB stock falls. I could be assigned Facebook shares if they falls under my strike price — but that’s fine, because I am willing and able to buy it there. Why? Because it’s a 23% discount to today’s price, so even if it does get there, I wouldn’t expect Facebook to be in terminal decline. It’d just be on sale. I can close this risk at any point between now and the expiration date.
Trade #2: Buy the FB Jun $125 call. This is a bullish trade for which I pay $.99 per contract. If FB stock rallies into my strike, its value will appreciate. Any increase would be pure profit since I am complete financing it with premium collected from trade #1.
If I am wrong on the upside potential and FB stock goes nowhere in 2016, then I still stand to profit $1.86 per contract from the puts sold. Any upward move in Facebook should yield additional profits.
Again, just a last reminder that selling puts is risky, so you should only do this is you’re willing to own FB shares at the sold puts’ strike price.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.
