For the past few weeks, Facebook Inc (NASDAQ:FB) showed relative strength when compared to other mega-caps like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple Inc. (NASDAQ:AAPL). Buyers seemed to have more conviction and were willing to take a little heat.
I want to leverage this buyer conviction to create income out of thin air. I don’t like to chase prices near all-time highs, but I am willing to bet that the recent lows will hold in such uber-bullish markets.
I realize that there will be corrections in FB stock but I also know that the fundamental story is bullet-proof in the long. This gives me courage to bet alongside it.
Click to Enlarge Facebook is part of the FANG gang. Others members of the acronym like Netflix, Inc. (NASDAQ:NFLX) are either bloated or have a lot of hopium tied to their bullish thesis, whereas FB has actual results now. So the valuation is one that is reality.
In addition, they also have all the ingredients for future excitement. Management proved itself with smart acquisitions. They also have the attention of billions of users daily to get their goals done.
Even at $170 per share, FB stock has a price-to-earnings ratio of 43. Compare this with NFLX and Amazon.com, Inc. (NASDAQ:AMZN) two other FANG component whose P/E’s are around five times bigger.
My thesis today is simple — FB stock is headed higher over time and buyers will step in to buy the dips along the way. I don’t want to buy it at face value without any room for error, but I will sell lower puts against it for income, so I’d be long FB but with an 8% margin for error.
FB Stock Trade Idea
The Bet: Sell the FB Sep $155 put naked and collect 90 cents per contract to open. Here I have a 90% chance of having price stay above my strike for maximum gains. Otherwise I will accrue losses below $154.10.
Selling naked puts requires margin commitment. To mitigate that risk, I can sell spreads instead.
The Alternate Bet: Sell the FB Sep $155/$150 credit put spread where I have about the same odds of winning, but here with less money at risk. Yet if it wins, the spread still can delivered 8% in yield.
Compare this with buying FB stock at all-time highs then hoping that it rallies 8% in 35 days just to match the performance of the spread.
Investing is never guaranteed, so I never risk more than I am willing to lose.
Learn how to generate income from options 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.