While many stocks have enjoyed a ride on the Trump train post presidential election, Facebook Inc (NASDAQ:FB) is most assuredly not among them. FB stock is now trading back at the critical $116 level, dropping sharply from the recent all-time highs at $133. With shares now oversold and underloved, I look for Facebook stock to hold this support over the coming few weeks.
As I mentioned in my previous post, $116 has been a key technical level over the past. The accompanying chart shows just how significant this price point has been for Facebook stock. FB has just clawed back above this level after briefly trading below it, a bullish technical sign. $116 should now be solid support for FB stock over the next few weeks.
FB stock had also become oversold on a nine-day RSI basis with readings below the 30 level. Previous instances when shares were at similar oversold levels proved to be meaningful lows in Facebook stock. I expect a similar price reaction in Facebook shares this time as well.
FB is usually highly correlated to the overall market, especially the NASDAQ 100. This makes sense, since Facebook is the fourth biggest component of the NASDAQ 100 with a weighting of 4.77%.
Recently, however, that correlation has broken down significantly. FB has been a huge underperformer over the past few months. I look for that typical relationship to converge and for FB stock to begin to outperform.
Implied volatility (IV) in FB options is at the 43% percentile while historic volatility (HV) is only at the 13%, meaning FB option prices are comparatively rich. This favors option selling strategies.
So to position bullishly in FB stock, a bull put spread trade is the way to play.
Trade Idea for FB Stock
Buy the FB Jan $110 puts and sell the FB Jan $113 puts for a 40-cent net credit.
These are the traditional monthly options that expire Jan. 20. Earnings are due Feb. 1, so the trade will expire well before earnings.
The short $113 strike price is 3.3% below the $116.86 Tuesday closing price of FB. It is also below the recent intraday low of $113.55 from November 14.
Maximum gain on the trade is $40 per spread while maximum loss is $260 per spread. Return on risk is 15.4%. I would close the trade on a meaningful move past the $113.55 lows while looking to have the spread expire worthless and keep the initial $40 net credit if FB 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.
