Facebook Inc (NASDAQ:FB) just reported earnings, and although it fell a little, I still believe that long term it’s a winner. It would be really hard to ruin a business that has billions of customers.
The slight drop on earnings does not change the fundamental fact that FB stock is not expensive in the long run. Some may nitpick the trailing price-to-earnings ratio as expensive but not when its growth rivals that of Amazon.com, Inc. (NASDAQ:AMZN) which is considered the mother of all growth companies.
FB stock’s sharp rise to new highs caught a lot of investors out. When fast moving stocks rally as fast as Facebook, they shackle traders as they wait for a pullback.
In my experience picking the perfect entry point is too difficult and there is always a trade to be set.
Click to Enlarge Most experts would tell you to wait out a few days after an earnings drop before you load long but I enter when I have a valid thesis. For the long term, FB stock will be higher than current much like Apple Inc. (NASDAQ:AAPL) or Alphabet Inc
(NASDAQ:GOOG, NASDAQ: GOOGL) were years ago. I am sure that many stayed out of GOOGL at $850 a month ago or at $800 last year thinking it was too expensive.
I am not suggesting that it will be a straight moonshot, especially now that markets are near all-time highs. I am not about to risk $150 per share buying the stock at face value and without any room for error. Instead, I will use Facebook options to get long with little or no money out of pocket.
FB Stock Trade Idea
The Trade: Buy the FB Jun 2018 $160 call for $11 per contract. It’s not unreasonable to expect a 6% move in over a year but if the cost if prohibitive I could change it to a debit call spread instead.
To mitigate my risk I want to reduce or eliminate my out-of-pocket expense. To do that I will sell downside risk below proven support levels throughout the time I am holding the calls and here is a good start.
The Bank: Sell the FB Dec $125 put and collect $2.50 to open. This would reduce my call expense by 20% as long as price stays above $125. I can leverage this with a bigger put sold count to calls but I must be willing and able to own it at $125 per share.
Whenever possible, I will also sell calls on a weekly basis to further lower the costs basis. This doesn’t create any additional risk since they would be covered by the ones I own.
Trading options is risky, so I never risk what I am not willing to lose. The risk can be greatly reduced by opting to implement this with spreads instead of naked options.
E-mail sellspreads@gmail.com with questions or join me to learn more about options in a personal 1on1 webinar here. 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.
