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This morning I am recommending another bullish trade on Facebook, Inc. (NASDAQ:FB).
I recommended a ratio call debit spread on FB at the end of January, and that move paid off. Now, FB is poised for another move to the upside, and I’d like to take advantage.
The Fundamentals Still Look Good
My last trade on FB was a cheap earnings play. I was betting that the company would beat expectations and share prices would rise afterward. That turned out to be correct, and FB jumped above the $165 level after reporting earnings at the end of January.
The stock was already starting to recover from the selloff in December, which sent FB to its 52-week low. The strong earnings report pushed FB well above $150, and I don’t see anything slowing the company down now.
Moving Toward Resistance at $180
On the daily chart for FB, we see a few things. Since reporting earnings, FB has found support at around the $160 level. We can also see that in late February, the stock bounced off its 200-day moving average (MA).
Daily Chart of Facebook, Inc. (FB) — Chart Source: TradingView
Yesterday FB rose back above its 200-day MA, and if it continues rising, its MA might not become new resistance. From there FB has two other resistance levels to overcome: $172 and $180.
There’s no guarantee that this rally carries FB to resistance at $180, but we don’t need it to go far for our ratio call debit spread to become profitable.
FB has climbed over 25% this year, and while the rest of the market sold off yesterday, it rallied more than 3%. Now is a good time to take advantage of the bullish momentum, which is why I’m recommending a ratio call debit spread on FB.
Using a spread order, buy to open 1 FB May 17th $185 call and sell to open 2 FB May 17th $195 calls for a net debit of about $0.35.
Note: Be sure you are opening the monthly FB options that expire on Friday, May 17, 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.