No one can argue the fact that Facebook Inc (NASDAQ:FB) changed how we interact with our friends and family. Even businesses now have an online presence that can have more potential than a traditional website. FB stock has been on a tear, and justifiably so with management hitting home runs.
On a technical basis, FB is currently at the upper end of a two-year-old ascending channel. This is not to say that it can’t rally past it, but combined with the fact that markets are at all-time highs on questionable fundamentals, I worry about Facebook’s short-term stock price. I expect the possibility of near-term dips while, further out, it remains on an upward trajectory.
Click to Enlarge Here, I want to capture a drop inside FB stock’s ascending channel. To reduce my out-of-pocket expense, I will use a bullish trade to finance my short-term bearish bet on it.
Taking a short-term bearish stance on FB stock by no means expresses my dislike for Facebook over the long haul … I am simply trying to profit from price action in the coming months using forward-looking fundamentals.
FB Stock Options
Trade #1: Buy the FB Aug 5 $111 put. This is a short-term bearish trade for which I pay $1.75 per contract. To win, I need FB stock to fall to my strike or lower in the next two weeks. Or else my put premium expires worthless and I take a loss. But, to lower my out-of-pocket exposure, I will set a second trade to offset my debit.
Trade #2: Sell the FB Dec $95 put. This is a bullish trade for which I collect $1.92 per contract. To win here I need Facebook to stay above $95 per share in 2016. I only sell puts if I am willing and able to own a stock at the strike price sold. Should FB fall below it this year, I face losses.
By taking both trades I am left with a net credit. So even if Facebook stock stays away from my positions, I still profit a little. This is a trade where the risk is minimal as long as I am willing to own shares of Facebook at a 20% discount from the current price.
Optional variation: If I have a portfolio that is already bearish, then I may want to consider doing the opposite of this trade. Instead of shorting the stock short term, I align both trades upward. So while the second trade remains unchanged, I modify the first trade to buy the FB Aug 5 $123 calls.
This would be a bullish trade that needs FB stock to rally toward the upper end of an expanded ascending trend line. The cost of this trade would be $1.82 per contract. Again this would be completely financed by selling the same $95 Dec FB put. And even if Facebook fails to reach my call, I am left with a small overall profit. Not too shabby.
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. You can follow him on Twitter at @racernic and stocktwits at @racernic.
