2018 has been the year of reacting to headlines in the stock market. Recently Facebook (NASDAQ:FB) earnings headline was ugly and the stock fell 20% on a report card that Wall Street hated. Just today, Apple (NASDAQ:AAPL) announced it removed a FB app from its app store because it was collecting data from users’ phones.
Despite all of this, FB has found footing around $172 per share. And it’s fair to say that Facebook stock has been swimming upstream for a few weeks.
Luckily prior to the post-earnings plunge, Facebook had mounted a 40% rally from the March lows. So overall for the last six months, FB lagged the Powershares QQQ Trust ETF (NASDAQ:QQQ) by about 10 points. Now the stock is coming into an opportunity point.
There is energy collecting from higher lows and lower highs that needs to resolve itself soon enough. The outcome can be either a breakout to $180 per share, or a breakdown to retest the recent lows.
As an investor, I prefer to bet on downside support rather than by and hope for a breakout rally. So in this case I sell downside risk below proven support to generate income without any out-of-pocket expense. If Facebook stock indeed breaks out I can at a later date add calls or debit call spreads to also participate in the upside potential. Until then I let time do the work for me in my short put position.
Fundamentally Facebook is cheap at a 24 price-to-earnings ratio. This is a growth company and those usually command much higher premiums. Compare that to Amazon’s (NASDAQ:AMZN) 173 P/E or Alphabet’s (NASDAQ:GOOGL) 53 P/E.
Facebook is a company that has the attention of over a billion people for hours at a time and on a daily basis. So it will take a series of mess-ups from management to break such potential.
Technically there is risk. Below $166 per share Facebook stock is vulnerable all the way down to $155 per share. This is not a forecast but a scenario of which I need to be aware. Facebook stock is already inside of a support zone, with several other ones below current levels. However management will need to deliver a decent report card in the next earnings season.
Click here for a detailed discussion of the Facebook opportunity with charts, and how the risk in this trade fits with the FB story today.
My main worry from the fundamental perspective is that management is going overboard to address the quality of the content. Having 20,000 humans reviewing posts seems like overkill, and I would like to see that effort abate. But for now the fundamentals and Facebook look solid.
This is a rinse-and-repeat trade for me as the prior one I shared a few weeks back paid quickly.
FB Stock Trades
The Trade: Sell FB JAN 2019 $145 put for $2.50. Here I have a 85% theoretical chance of success. Otherwise and if price falls below it then I would suffer losses below $142.50.
Selling naked puts is daunting especially near all time highs. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell FB JAN 2019 $145/$140 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade require a rally to profit.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
