Shares of Facebook Inc (NASDAQ:FB) have certainly not been liked as of late. After making new all time highs at $193.09 on Feb. 1, Facebook stock has plunged over 12% to close at $169.39. Certainly much of the drop was warranted based on the recent issues surrounding FB. But now that it has officially entered bear market territory, it is time to take a look a where to be a buyer of Facebook stock on further weakness.
The impetus behind the recent drubbing is the well-publicized news of pervasive data sharing by Facebook, raising serious privacy issues. The fear of heightened regulations and loss of advertising revenues has had a profound negative pricing effect on internet stocks generally and Facebook stock in particular.
While certainly earnings and multiples will likely be lowered in the short term, over the long run Facebook will remain an integral part of the ever-expanding social media mix. FB is also at the lowest P/E multiple ever for the stock, meaning it has never been cheaper on that metric.
From a technical perspective, Facebook stock is now at the most overbought level in the past 9 months on a 9-day RSI basis. Previous times that FB approached similarly overbought readings proved to be significant short term lows in the stock. More importantly, Facebook stock once again held the crucial $162 support level.
The price action from yesterday was encouraging, with FB failing to make lower lows and also reversing to close higher on the day after opening sharply lower. This type of reversal is many times emblematic of a bottoming in the stock as the sellers have become exhausted.
Click to Enlarge FB options are also trading at the 71st percentile of implied volatility (IV), meaning they are comparatively expensive — certainly not unexpected given the magnitude of the recent carnage. This favors option selling strategies and also means that these trades scan be structured further out of the money for the same net credit, thus providing a bigger cushion. So to position to be a buyer of Facebook stock on an even further drop, a put credit spread trade makes sense.
Facebook Stock Trade Idea
Buy FB Apr $150 puts and sell FB Apr $155 puts for a 70-cents net credit
Maximum gain on the trade is $70 per spread with maximum risk of $430 per spread. Return on risk is 16.3%. The short $155 strike price provides a 8.5% downside cushion to the $169.39 closing price of Facebook stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility/.
