Shares of social media giant Facebook (NASDAQ:FB) got clobbered to the tune of more than 20% after hours on Wednesday following the company’s latest earnings report. Those “traders” who bought exposure to the stock in anticipation of another post-earnings rally are particularly set for a rough day on Thursday.
Luckily this drop in FB stock also provides an opportunity. Here are two specific ways I am looking to capitalize on this drop.
So you know, although Facebook’s latest quarterly report missed the revenue estimates of analysts, what really led to the stock’s drop was a growth warning on the earnings call. Essentially, if management’s outlook is accurate Facebook is now much less of a top-line growth company than analysts had plugged into their models.
As much as Facebook in my eye remains a great longer-term growth story, the uber-bullish sentiment was always a concern of mine, especially heading into earnings reports.
FB Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
To put some visuals around all of this, let’s go to the multiyear weekly chart. Here we see that FB stock for the most part since about 2015 has ascended in a well-defined up-trending channel. Each time the stock reached or breached the upper end of the channel it ultimately mean-reverted back to the bottom of the channel.
In the summer of 2017, the stock pushed above this channel, which by February 2018 then led to a sharp 23% corrective move into March … where the stock began to rally from again.
Over the past few weeks, FB stock was once again being chased above the trading channel and right into earnings. The 20%-plus clipping that the stock is experiencing now after the July earnings report for now is just a mean-reversion move.
From this angle and from a longer-term time frame perspective FB stock should be a good buy anywhere in the $160-$170 range.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, I also marked where FB stock, according to after-hours trading, is indicated to start trading on Thursday. In the near-term the stock could gyrate wildly as the investor base makes up its mind about the stock and analysts spew their comment.
But this is where a simple but effective options selling strategy could play out real well. In my eye, FB stock will likely be capped on the upside around the $185-$190 mark for the time being. Thus, selling an options “bear call spread” using October monthly options — selling the $185 strike and buying the $190 strike — in my eye would be a good risk-to-reward trade in the near term. This trade will also capture the inevitable implied volatility decay that will happen in coming days.
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