Are you a believer in constructive price charts? If you are — and if you like Facebook Inc (NASDAQ:FB) — then I might be able to sell you on a second coming in FB stock.
That said, I like to remain firmly planted in reality, so rather than going whole-hog on Facebook shares, I have a well-positioned, limited-risk way to trade alongside the longs.
Since Facebook’s very well-liked late July earnings report, investors have collectively been backpedaling. The good news is we’re not talking about an Armageddon-style panic. But does that mean the time is right to be a devout believer?
Mark Zuckerberg is doing his part to ensure Facebook’s massive and growing base of faithful — a number larger than any religion, save Christianity — remain dedicated to the social media powerhouse. The CEO recently gave a blessing of sorts to creators of Facebook groups and has implied religious-type aspirations for the company’s ability to bring people together.
In Zuck we trust?
In surpassing the 2 billion mark for monthly active users and enjoying an astonishing 1.32 billion daily adherents, Facebook certainly has its adherents to that message. But does that translate into a bullish prophecy for FB stock?
Facebook’s Weekly Chart
Click to Enlarge
In my mind, FB is tempting investors with a technical-based second opportunity to get long shares at levels mostly in keeping with pre-earnings prices.
I’d personally like to believe Facebook can hold its immediate chart support and turn higher from here. But given market seasonality and a historic rally, I’m inclined to err on the side of caution.
How to Trade FB Stock
I like the Oct $170/$175/$180 long butterfly at the moment. This spread costs 75 cents with Facebook shares trading just north of $166, and offers a decent blend of risk and reward.
The spread offers moderately bullish traders the opportunity for range-bound profits from $170.75 to $179.25 at expiration. The sweet spot for maximizing gains of $4.25 rests at $175 — for all intents and purposes, a challenge of Facebook’s post-earnings all-time highs.
Recapturing $175 would require a rally of around 5% into October expiration from the current FB stock price.
I just don’t want Facebook to rally too aggressively. If shares climb above $180 (roughly 8.5% higher), the butterfly’s value will collapse to zero at expiration. If that occurred, both embedded verticals expand to $5 each and the trader will forfeit the 75-cent debit.
Traders face the same small loss at expiration below $170. Thus, a marginal rally won’t improve the bottom line, either.
Still, risk is contained to less than 0.5% of Facebook shares, yet the economic benefit is considerable. If you’re like me and also cautious about the market, this is the way to trade FB stock now.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits and feel free to click here to learn more about how to design better positions using options!
