Mega-tech took it on the chin on Wednesday. Although they found footing on Thursday, they are still down billions in market cap. They may still have time to recover the rest if the flow of good news from Politicians on the Tax bill continues.
Critics of high-tech stocks like Facebook Inc’s (NASDAQ:FB) complain that they have run too far. The stock is up 50% in 12 months. By the way this is true for Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN) too. They are all up over 40% for the same period. Of them all, FB is the cheapest relative to their respective growth rates.
Facebook has over a billion users who are engaged daily and for hours at a time. The potential of such a base is extremely exciting to me.
It is hard not to find new income streams from such a clientele commitment. We know they are making forays into video, so Netflix, Inc. (NASDAQ:NFLX) should be really worried.
A steep stock chart doesn’t necessarily make for an expensive stock. And neither does a high price tag. So FB stock at $177 per share is still reasonably priced. It sells at a 33 price-to-earnings ratio and 8.5 price-to-book. Given that it grows around 50% and maintains 85% gross margins, the price tag is earned.
Technically, Facebook stock has had its challenges of late. This recent dip is its third incident in two months. It has recovered from the last two, but the fewer times traders test FB stock support, the better. The steep rise means that it becomes important to hold the ascending trend line. Else if the bears breach it then they could invite momentum sellers.
Click to Enlarge Those are the fears that I want to use to create income with no out of pocket expense.
My macroeconomic thesis still favors the bulls for the next few months. So, for the today I want to sell downside risk against proven support levels in Facebook. If price stays above it then I would create income from nothing. I do this because at these altitudes, I have stronger conviction in FB value below than upside targets above. So I don’t even need a rally to profit.
FB Stock Trade Idea
The Trade: Sell FB Jan 2018 $160 naked put for $2.11. This is a bullish trade which has an 85% theoretical chance of success. But if price falls below $158.50 I would own the shares and accrue losses.
Selling naked puts carries big risk especially when equity markets are near all-time highs. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the FB Jan 2018 $160/$155 credit put spread. This bullish trade has a similar odds of winning but with much smaller risk. Yet it can still deliver 10% in yield.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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 as @racernic on twitter and stocktwits.