Facebook Inc (NASDAQ:FB) reported earnings last night and the reaction in after hour trading was astonishing. FB stock fell 5% on the knee-jerk reaction but then bounced +2% higher on the comments from the conference. Investors initially feared the recent changes in ad display policy shift, but then management assured us that this won’t affect their bottom line. That is all traders needed to hear.
This wasn’t the first time this happened. Early January when the headline first broke that they would tweak stream parameters, FB stock fell 6% and that was an easy knife for us to catch. Last night, I was itching to reset the same trade. Alas the stock rebounded too fast but that price action is a tradable thesis that I can deploy today.
Management just delivered a strong earnings report. The fundamental prospects for FB are still fantastic. So as long as the stock market is in a bullish phase, I want to profit from being long Facebook stock.
How to Trade FB Stock Here
Given Facebook stock’s price-to-earnings ratio of 35, it is fundamentally cheap, especially when you consider the growth it maintains. Sure it’s twice the P/E of Apple Inc. (NASDAQ:AAPL) but I put it more in the category of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) than AAPL. So being long FB would not be invoking a lot of hopium. The company is doing great here and now. Furthermore, they have several other platforms like Whatsapp that they have yet to monetize.
This is a company that has 1.4 billion daily active users. It would take a serious flub to fail with a reach of this size. They told us that they are committed to making the user experience better and that they are ready to handle the bumps along the way to accomplish it. These are not worries to fret, but the outlines of a plan of action that keeps the current bullish thesis alive.
Technically, I see pivot points around $175-per-share from the daily chart and $160 zone from the weekly. I will use the lowest of the two to guard my risk today. I consider this a fundamental trade in a conservative portfolio.
The only aggressive aspect of it is that markets in general are near all-time highs. There is also short-term risk from politicians while they work out their differences over the next few weeks.
The Trade: Sell the FB Apr $160 put and collect $1-per-contract to open. I have a 85% theoretical certainty that I retain maximum gains. Otherwise, I will accumulate losses below $159.
Selling naked puts is daunting, especially near all-time high stock markets. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the FB Apr $160/$155 credit put spread, which would deliver over 10% in yield but with much smaller risk. Both set ups have about the same odds of success.
Today’s trade, although it would benefit from one, doesn’t need a rally to profit. I merely need FB stock to hold its support for the next quarter. It is important know that if they do, then I want to own the shares at a discount from here.
Ultimately, 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.
