Shares of Facebook, Inc. (NASDAQ:FB) have certainly rebounded strongly over the past week after a bruising sell off. Facebook stock rallied the most in two years on Tuesday as CEO Mark Zuckerberg began his Senate testimony on the privacy concerns that torpedoed the stock.
While the panic selling that drove the stock down from all-time highs was likely overdone, the recent strong rally is also getting extreme. I look for the rally to stall and expect Facebook stock to settle in around current levels before earnings on April 25.
Facebook stock is definitely getting overdone from a technical perspective. MACD is now at the second-highest level over the past six months. Previous instances when readings exceeded .75 proved to be significant short-term tops in FB. There is also major overhead resistance looming at $172. The critical 200-day moving average at $173.16 should provide additional headwinds for any rally.
Facebook stock also failed to hold on to the highs yesterday. FB traded up to $168.65 before reversing course and closing some 2 points lower. This type of reversal pattern, especially following such a strong rally, is usually a sign the buyers may be exhausted.
In my previous article on Facebook from March 22, I had a somewhat bullish viewpoint on FB. I felt that Facebook stock was deeply oversold and may finally be finding a floor around the $162 level. Now that Facebook stock has rallied sharply to the close at $166.32, my guardedly bullish stance has tempered — because price does matter.
Implied volatility (IV) in FB options now stands at the 79th percentile, meaning option prices are still comparatively expensive. So to position for the furious counter trend rally in Facebook stock to cool down, a bear call spread makes intuitive sense. Earnings are due April 25 for Facebook so it is prudent to position the trade to expire before then to eliminate any earnings based price risk.
FB Stock Trade Idea
Buy FB Apr $175 calls and sell FB Apr $172.50 calls for a 40 cents net credit
Maximum gain on the trade is $40 per spread with maximum risk of $210 per spread. Return on risk is 19.05%. The short $172.50 strike price provides a 3.7% upside cushion to the $166.32 closing price of Facebook stock. These are the traditional monthly options that expire April 20.
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/.
