Shares of Facebook Inc (NASDAQ:FB) have fallen nearly 12% in the past month since reaching an all-time high of $133.50 in late October. While some of the weakness is likely attributable to the Trump victory, the selling has gotten overdone.
Facebook stock had a solid day yesterday, closing up $2.02 after trading lower in the day. I expect this strength to continue into the normally bullish year-end period.
Shares of Facebook tested critical support at the $116 level and held nicely. I touched on this critical support area in an earlier article.
As the chart below shows, FB has twice tried to break past the $116 level only to rally and trade back above it. This double bottom at the $114 area bodes well for Facebook stock for the short term.
FB is also extremely oversold on a 14-day RSI basis. Previous instances when Facebook stock was this oversold proved to be intermediate-term lows in the share price. I expect this to be the case again, with Facebook stock being a solid performer over the near term.
Of the top 10 biggest U.S stocks by market cap, Facebook was the by far the worst performer over the past month. This also bodes well for FB stock from a contrarian standpoint, with FB stock likely to be a relative outperformer.
It is also important to note that Facebook did soundly beat both earnings and revenue estimates in their latest earnings report on Nov. 2. Earnings came in at $1.09 versus estimates of 97 cents while revenues beat estimates by nearly $100 million. Facebook stock has sold off since then, so the combination of a big earnings beat and a lower stock price makes valuation more attractive at current levels.
So to position for support to hold in Facebook stock, a bull put spread strategy is the way to play.
FB Stock Options
Buy to open FB Dec $110 puts and sell to open FB Dec $113 puts for a 56 cents net credit. These are the quarterly options that expire Dec. 30.
Maximum risk on the trade is $244 per spread, with a maximum gain of $56 per spread. Return on risk is $22.95%. The short $113 strike price is positioned well below the $116 support area and 3.77% below the closing price of FB stock.
I would stop out the trade on a meaningful break of the $114 double bottom support level while looking to let the spread expire worthless and keep the initial $45 credit if Facebook stock remains well-behaved.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
