Facebook (NASDAQ:FB) has become the stock Wall Street loves to hate. It falls on headlines that, in the past, wouldn’t even budge Mark Zuckerberg & Co. This morning, Facebook stock fell 3% on a headline that Instagram’s founders are leaving the company. I bet most people wouldn’t even know their names yet, here it is affecting FB as if the company had reported another bad quarter. There are many reasons why people leave a company, so therein lies the opportunity.
I was lucky enough to have closed a long position yesterday for a short scalp opportunity. I will reset it on this morning’s dip and make it an early entry into a bullish position into Facebook’s next earnings report.
No, I will not buy the shares at $161 and leave no room for error. Instead, I use Facebook’s options market where I can minimize my out-of-pocket expenses. In this pair trade, the first trade is designed to capture the upside potential in Facebook stock; the second is to finance the bet.
FB earnings will be a binary event as all earnings reports are. Even if we know the company results, we don’t know how investors will react to them. But in the long run, Facebook is a company with more than a billion users engaged on their platform for hours at a time every day.
There is definite potential here since FB stock is not expensive. Shares trade at 22X trailing 12 months price-earnings (P/E) ratio. This is half as expense as Alphabet (NASDAQ:GOOGL). It’s even cheaper than Twitter (NYSE:TWTR) and FB is a far better earner than Twitter stock.
The stock looks broken, sure, but the company is not. I don’t like how management is totally apologetic about its money-making ability. They are too worried about saving face. But in the end, they do have a responsibility to their shareholders, so FB will strive to make as much money as possible.
I do worry about the extent they are going to strip their content of offensive posts but, in the end, this too shall pass.
Technically, FB stock has support down to $150 per share. But if it’s lost, that could invite more sellers. I don’t anticipate it happening unless the markets, in general, correct as well.
Long term, I expect Facebook to not only survive but to thrive. This is a company that owns many platforms that have close to a billion users as well. In other words, it has too much potential to fail, so I am confident that if I buy Facebook stock I will profit for years to come.
The Upside Potential: Buy FB $180/$185 debit call spread for 95 cents per contract. I need the Facebook stock price to rally past my strikes to profit. To mitigate my out-of-pocket risk, I sell downside risk into proven support.
The Bank: Sell FB Nov $140 put and collect $1.50 to open. If the price stays above my puts, then I am a winner already. Otherwise, I own FB shares at a deep discount from here.
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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.