Facebook (NASDAQ:FB) broke out above the $200 level for the first time ever yesterday. FB stock is now up over 30% in less than three months after bottoming out near the $150 level in early April. The data privacy issues that torpedoed the stock are all but forgotten. Facebook co-founder Mark Zuckerberg is poised to pass Warren Buffett to become the third richest person.
All is good … maybe a little too good. And when things are too good to be true, they usually are. My contrarian trader instinct tells me the time has come to take a short position in Facebook.
Facebook is getting pricey from a historical valuation perspective. FB stock now sports a 33 P/E, nearing the highest level of the past year. The last time Facebook carried such a rich comparative valuation (last July), it put a decided damper on the stock.
Further multiple expansion is unlikely, which should provide significant headwinds to the recent rally.
FB stock is once again overbought on a nine-day RSI basis with a reading over 70. Previous instances when this metric exceeded the 70 threshold marked a significant short term top in Facebook shares.
FB is also trading at a largest premium to the 50-day moving average over the past year. Prior times when Facebook got this over extended invariably resulted in a pullback in price towards the 50-day moving average. After making a new all-time intraday high at $203.55 yesterday, FB stock did pull back and close well off the high at $202. This may likely signify that the buyers are becoming a little exhausted following such a massive rally.
Although implied volatility (IV) in Facebook options has ticked up recently, it is still comparatively cheap at the 35th percentile. This favors long option strategies when constructing trades. So to position for a pullback in FB stock, a put diagonal trade makes probabilistic sense.
FB Stock Trade Idea
Buy FB July $200 puts and sell FB June 29 $197.50 puts for a $2.70 net debit or better.
Maximum risk on the trade is $270 per spread. Ideally FB stock closes near $197.50 at June 29 expiration. The trade is 15 deltas net short at inception, which is the equivalent of being short 15 shares of Facebook.
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.
