Facebook Inc (NASDAQ:FB) has recently come under severe pressure, but through no fault of its own. FB stock is caught in a whirlwind trade — “The Trump Trade,” or TTT.
Money is flowing out of recent stock stars and into laggards. Now, investors are chasing banks, biotechs, materials and industrials. The piggy bank for this chase has been mega-tech equities like Facebook stock.
Former favorites — such as Alphabet Inc (NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN) — have had full corrections in a few days. Even the mighty Netflix, Inc. (NASDAQ:NFLX) fell $20 per share off its recent highs.
TTT is most obvious in the Russell 2000 small-cap index, which finally reached a new all-time high. The small caps are somewhat sheltered from the effects of crashing mega-cap tech companies, so they reap the full benefits of the Trump reflation trade.
The moves have been neck-breaking.
The small caps went from a technical correction to new high in a week. Banks have rallied so hard that we have to refer to levels not seen for over a decade. This likely won’t continue at the same pace.
But while my initial reaction is to short small caps, instead, I believe in starting new longs in quality mega-caps like FB and GOOGL.
How to Trade FB Stock
Today, I want to initiate a cautious long in Facebook stock. I am not one to catch falling knives, but I do believe we can stabilize in the mid-term and find cautious levels against we can sell risk.
Bet #1: Sell the Jan $100 put for $1.25 per contract. By doing this, I am committing to buying FB stock at $100 per share, even if it falls below my mark through mid-January. This leaves me with a 13% buffer from current price and an 85% theoretical chance of success.
Click to Enlarge Usually I like to sell the opposite risk to hedge my bet. But in this case, I can’t justify selling upside risk after a correction like the one Facebook just had. So, I will delay such entry and watch for better entry points — perhaps after a nice bounce.
Since this trade is unhedged, I’d employ tight stops. I could buy cheap shorter-dated puts to guard against the disaster moment.
Bet #2: I only sell naked puts when I am willing and able to own the underlying stock at the strike sold. Otherwise, I can modify the trade here into a bullish put spread. This would be more conservative given that it has finite risk as a worst-case scenario.
Sell Jan $100/$97.5 credit put spread for 27 cents per contract. This leaves me with the same buffer and same theoretical chance of success as the initial trade. The difference here is that I have much less exposure to FB stock in case I am wrong. If successful, this trade yields 11% on money risked in a couple of months.
I am not required to hold these trades through expiration. I can close either for partial gains or losses at any time.
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.
