Shares of Facebook Inc (NASDAQ:FB) put in a solid day yesterday, rallying over 2%. After struggling following a somewhat tepid earnings report, Facebook stock appears to have finally got its footing back.
While I don’t expect a rip-roaring rally to fresh new highs, I also feel that the lows are likely in for the short-term in FB. A consolidation period is probably on the horizon for Facebook over the coming few weeks.
In my previous post on Facebook stock from Feb. 2, I put forth a bearish thesis on Facebook stock and recommended a long put trade with FB at all-time highs. This proved to be the correct call as Facebook stock dropped sharply. Now that Facebook has fallen nearly 5%, my bearish tone has tempered decidedly because price does matter.
The technicals also point to a short-term low being put in place for Facebook stock. There is major support at the $173-level, which has now held on three separate occasions. The MACD also just generated a buy signal after reaching extremely oversold levels earlier.
The price action from yesterday was also encouraging, with FB opening lower only to reverse course and close higher and very near the highs of the day. This type of pattern is emblematic of strong underlying buying in Facebook.
FB options are trading at the 57th percentile of implied volatility (IV), even after earnings, meaning option prices are still comparatively expensive.
This favors option selling strategies when structuring trades. So to position for Facebook stock to hold support over the coming weeks, a bullish out-of-the-money put spread is the preferred trade.
Facebook Stock: Trade Idea
Buy the FB Apr $165 puts and sell the FB April $170 puts for a 65 cents net credit
Maximum gain on the trade is $65-per-spread with maximum risk of $435-per-spread. Return on risk is 14.94%. The short 4170 strike price is positioned well below the $173 support level in Facebook stock and provides a 7.46% downside cushion to the $183.71 closing price of FB.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about Tim and option-based strategies can go to https://marketfy.com/item/options-and-volatility/