FB is Finding Support at $144

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This morning I am recommending a bullish trade on Facebook, Inc. (NASDAQ:FB).

FB fell in December, along with the rest of the market, but since then it has regained nearly 19% of its value. The stock is in a good position to rally if it reports strong earnings this week, and I have a cheap bullish play in mind.

Rally After Earnings

If we look at the chart below, we can see that FB rose from April to July of 2018 after reporting strong earnings. After reporting weaker earnings in July, FB fell into October. From there, the market started selling off, and the stock lost even more value.

Daily Chart of Facebook, Inc. (FB) — Chart Source: TradingView

The selloff in December sent the stock to its 52-week low, and now it is starting to recover. After encountering some resistance at the $150 level, the stock found support at $144. While there is some overhead resistance, a strong earnings report could help FB break above $150.

A Cheap Earnings Play

With FB finding support, I think a cheap bet on strong earnings is a good way to trade the situation. Tech stocks are generally doing well, and my trade recommendation won’t cost more than a few cups of coffee. So this morning, I’m recommending a bullish ratio call debit spread on FB.

Using a spread order, buy to open 1 FB April 18th $155 call and sell to open 2 FB April 18th $165 calls for a net debit of about $0.20.

Note: Be sure you are opening the monthly FB options that expire on Thursday, April 18, 2019.

The Good Friday holiday falls on April 19th, 2019. Because U.S. markets will be closed that day, April monthly options will expire the day before, on April 18th, 2019.

About Ratio Call Debit Spreads

A ratio debit spread is simply a way to lower the cost of buying options, as the two options that you sell to open (short) help offset the cost of the option that you buy to open. Therefore, this ratio call debit spread is a way to lower the cost of establishing a bullish call option trade. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a ratio debit spread; contact your broker directly for specific requirements.

Because you are short a naked call in this ratio call debit spread, one risk is that the underlying stock could unexpectedly move up sharply. If that happens, we would need to buy back to cover and close the naked call option for a loss.

The other risk due to the naked call is if the stock moves up sharply the call could be assigned. This means that for every 1 call option we sold to open (shorted), we would need to buy 100 FB shares on the open market at an unknown higher price and then sell the shares at the $165 strike price for a loss. So, this is inherently a higher risk play. Keep your positions small.

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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.


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