What’s not to like about Facebook Inc (NASDAQ:FB)? Right now, apparently nothing. But for bulls who want to act on the idea that the trend is your friend, I have a better idea than an outright purchase of Facebook stock.
Facebook’s ‘Zuck’ or Mark Zuckerberg has been spied swapping out the infamous hoody for dress sweaters and sports coats. Buzz of a future in politics has been trending on social media following Zuck’s public missive last week on his social media network of choice.
One guess. And it wasn’t Twitter Inc (NYSE:TWTR).
With optimism in the broader markets reaching historic extremes over the past week, investors now like Facebook stock a bit more as well.
Back on Feb. 7, I wrote about Facebook firing on all cylinders following an earnings report which proved nothing short of super likable. Nonetheless, a strong rally to test its all-time highs in front of the corporate confessional gave way to a bearish-looking, “sell the news” reaction.
But with the post-earnings trading now looking a bit more like “fake news,” is it time to like FB stock more than in our prior analysis?
Facebook Stock Chart
Other than a stray 10-cent push through the earnings reaction low two days after the event, FB has remained inside the bearish engulfing candle for a remarkable 12 straight trading days.
Shares of Facebook stock also have spent the better part of the last two weeks in narrow trade flirting with the prior high of $133.50. FB has impressed with its ability to pull away from the gravitational forces of the engulfing candle and bearish double top.
Given the extremely well-liked broader market environment, it would be foolish to not appreciate its influence. Not to mention, the relative lull and technical ennui of the past couple weeks could easily result in buyers piling into FB stock as part of a rotation process.
How to Trade FB Stock for 470% Returns
Traders who agree that Facebook might be due for another modest round of bullishness should look at the 10 March $135/$137/$139 call butterfly.
With Facebook stock at $133.72, the spread is priced at 35 cents and maintains a profit range at expiration from $135.35 to $138.65. Thus, if FB can rally between 1% and 3.7% over the next 13 business days, the trader can realize some type of profit on this positioned butterfly.
The profit sweet spot is $137 where two call contracts have been sold. Were shares to rally by 2.5% into expiration, the spread would expand to $2 and result in a profit of $1.65, or a 470% return.
If shares of FB fail to rally above $135.35, the 35-cent debit is ultimately at risk of being lost. It’s small, but shouldn’t be overlooked. Also, don’t overlook the possibility that investors really get interested, as the position could face losing 35 cents if Facebook shares get above $139.
But given the low cost of entering into the butterfly, as well as the extended and precarious position of the broader market, I’m OK with putting a ceiling on this trade.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.