Facebook Inc (NASDAQ:FB) is ready for a breakout. Despite being up nearly 59% so far this year, FB stock is in the midst of a short-term technical formation that could result in surprising gains heading into 2018.
If you’re looking for a way to capitalize on gains in the FB stock price, I’ve got you covered.
If you’re a regular here at InvestorPlace, you may have already heard about Facebook’s breakout potential. Bret Kenwell said as much recently when he delved into Facebook’s strong fundamentals and long-term technical uptrend.
Click to EnlargeAdding to Bret’s analysis, FB stock is nearing the end of a short-term cup-and-handle technical formation.
Looking at a chart of FB, you can see the initiation of this pattern just after Facebook’s strong quarterly earnings report. The shares topped out near $183, and then proceeded to consolidate those gains during the rest of November.
FB completed the “cup” portion of the pattern this week by once again challenging resistance near $183. The shares have now entered the “handle” phase, which is marked by a brief period of consolidation before the shares breakout sharply higher, as penned up buying power pushes FB stock past $183 and toward new highs.
Short-term sentiment readings indicate that such a breakout could surprise more than a few pessimists next month. Specifically, the December put/call open interest ratio comes in at a 0.85, with puts nearly in parity with calls. That said, peak call OI of 58,000 contracts rests at the Dec $185 strike, meaning that some speculators are looking for a rally heading into expiration.
Overall, December implieds are pricing in a potential move of about a 3% for FB stock ahead of expiration. This places the upper bound at about $187.50, while the lower bound lies at $177.50.
Two Trades for FB Stock
Call Spread: For those looking to capitalize on a FB stock breakout, a Dec $182.50/$185 bull call spread has considerable potential. At last check, this spread was offered at $1.03, or $103-per-pair-of-contracts. Breakeven lies at $183.53, while a maximum profit of $1.47, or $147-per-pair-of-contracts — a potential 42% return — is possible if FB stock closes at or above $185 when December options expire.
Put Sell: For those traders looking for a more neutral-to-bullish play, an FB put sell may be just what you are looking for. At last check, the December $175 put was bid at 58 cents, or $58-per-contract. As long as Facebook stock trades above $175 through expiration, traders pursuing this strategy will keep the $58 premium. However, if FB trades below $175 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $175-per-share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.