The unfriending has begun by users of Facebook Inc (NASDAQ:FB) as a less-friendly trend emerges on the Facebook stock chart. With that said, it’s time to cozy up to FB bears with a long put vertical on Facebook stock. Let me explain.
If you haven’t heard about Cambridge Analytica yet, it was revealed earlier this week that the social media giant allowed nearly 50 million Facebook users personal information to go to a political technology outfit with ties to the 2016 Donald Trump campaign. I can hear the words “fake news!” already.
Alas, Facebook execs came out publicly Wednesday with their collective mea culpas and vowed to make amends, earn back users trust again and blah, blah, blah. If the chain of events sounds eerily familiar to the “fake news” election meddling drama that unfolded last year, it should. But this time it might actually be different for the company and Facebook stock.
Bottom line, users are leaving the Facebook community. At the same time, Twitter and Instagram are trending heavily with increased traffic as everyone from average Joe’s to more outspoken and widely followed types — such as Cher and WhatsApp co-founder Brian Acton (whose company was sold to Facebook for $19 billion in 2014) — make their defections known.
To say the least, this black eye for Facebook is looking a good deal more threatening. Optimistically, you could say it’s just the second strike thrown at the company. However, with a second and harder-hitting strike starting to play out technically on the Facebook stock chart, that’s reason enough for FB bulls to unfriend shares today.
Facebook Stock Daily Chart
A month ago, I wrote cautiously of Facebook stock’s first technical strike against owning shares in a long while. Following a spectacular year of tenacious price action and strong returns for investors, FB broke its steeper support line as Wall Street collectively rejected a very brief post-earnings celebration to fresh all-time-highs.
Since then, FB shares did manage to grudgingly fight their way modestly back above the prior uptrend support line. But the unconvincing action came undone this week as Facebook stock plunged back below the trend-line to fresh lows.
Technically, the price action sets in motion the start of a downtrend pattern. This should lead to a much deeper correction given an absence of this type of meaningful and healthy price action in Facebook stock since breaking out nearly five years ago.
Facebook Stock Bear Put Spread
Considering our continued view that Facebook stock is at risk of a larger correction and examining FB options for bearish positioning, one favored combination for positioning is the June $160/$145 put spread.
Priced for $3.50 with FB shares at $169.39, this vertical substantially reduces Greek risks and limits dollar exposure to a defined amount of around 2% of shorting Facebook stock.
In this instance, using the June contract for establishing the vertical allows the trader to more safely navigate earnings in early May and remain positioned into June.
Thus, should our thesis of more investors unfriending Facebook stock and a larger correction take hold in the days and weeks ahead, this vertical stands to be a very friendly way for bears to profitably unlike FB.
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.
