Shares of Facebook (NASDAQ:FB) have been under unrelenting pressure lately. Facebook stock is now down 10% so far this year and has fallen over 25% from the all time highs in late July. This puts FB stock firmly in bear market territory. Certainly some of the selling was justified given the ongoing privacy issues and lowered growth expectations. At some point, however, the selling is no longer warranted. I think we are close to reaching that level in Facebook.
Click to Enlarge The recent carnage in Facebook stock has made shares much more attractive from a fundamental perspective. The current P/E ratio of 22.50 is the cheapest FB has been. Other metrics, such as price to sales and price to cash flow, are also at trough valuations. While earnings growth has assuredly slowed due to the ongoing privacy concerns, it is important to remember that earnings are still indeed growing.
At some point valuations do matter.
FB stock is at a critical technical juncture. Facebook broke major support at the $171 area and is hovering right at crucial support at $160. Shares are not too far from the reflexive lows at the $150 level. Money flow is fast approaching extremes that have signaled significant lows in the past.
FB is also trading at major discount to the 100-day moving average, another sign that the selling may be nearing a climax.
Click to Enlarge Implied volatility (IV) in FB options is at the 77th percentile, meaning option prices are comparatively expensive. This favors option selling strategies when constructing trades. Earnings are due Oct. 30, so we will want to have the trade expire before that date to avoid any earnings risk. The impending earnings announcement should also serve to dampen actual volatility somewhat in front of the release date.
So to postion for the selling in Facebook to subside, a put credit spread makes probabilistic sense.
Facebook Stock Trade Idea
Buy FB Oct 26 $147 puts and sell FB Oct 26 $150 puts for a 40-cent net credit.
Maximum gain on the trade is $40 per spread with maximum risk of $260 per spread. Return on risk is 15.4%. The short $150 strike price provides a 5.6% downside cushion to the $158.85 closing price of Facebook stock.
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.
