If you liked Facebook Inc (NASDAQ:FB) prior to a mostly friendly earnings report, then getting reacquainted with FB stock may sound like a good idea. But for bullish traders that are agreeable, rather than getting long shares, a moderately bullish long call butterfly spread is a more likable position.
Let me explain.
Social media giant Facebook delivered a super “likable” Q3 report Wednesday night, beating Street profit and revenue estimates on continued, strong growth trends. And traders were caught buying the news in FB stock as shares jumped to record highs in the immediate aftermath of the report.
But then an unwanted guest dropped in on the conference call and set the tone for Thursday’s 2.05% decline in FB stock. The company announced its 2018 expenses would rise 45% to 60% from 2017 levels.
Facebook is ready to commit greater resources to cyber-security following the ongoing controversy the role social media and fake news had on the 2017 Presidential election.
FB Stock Weekly Chart
As reported above, investors failed to “like” FB stock following Wednesday night’s earnings report. In the scheme of things though, Facebook’s decline on Thursday can and rightfully should be chalked up to modest profit-taking. That’s sensible enough given 2017’s heady, but steady return of around 58%.
Looking forward, given FB’s solid quarterly results and without making fake news out of Thursday’s mole hill; shares of Facebook are still in a very constructive uptrend that continues to support buying on weakness until proven otherwise.
FB Trade: Moderately Bullish Butterfly Spread
Earlier this month, I discussed a vertical that was up more than 100% in front of earnings. The bull call spread in question expanded from $2.00 to $4.15 by Wednesday’s close and offered traders a solid opportunity to adjust or take profits of some kind prior to Facebook’s quarterly release.
Given our bullish view on FB, but also pragmatic about limited stock returns in the near-term, I like the idea of positioning for profits in an above-market trading range using a long butterfly strategy.
This type of combination greatly reduces trader’s out-of-pocket cost while offering reasonable profit potential and even fairly substantial gains if shares really cooperate.
The one caveat is risk isn’t limited to losses in just one direction. Ultimately, if FB stock is either below or above the spread at expiration, the full debit is lost. However, as the anticipation is for capped gains in the short-term, an out-of-the-money butterfly is approachable.
Reviewing FB’s options, the Dec $180 / $190 / $200 call butterfly for up to $2.25 is attractive. With shares at $178.91, this combination offers a profit range from $182.25 to $197.75. Thus, a rally of just 1.80% to a more challenging climb of nearly 11.7% can yield some type of return for this trader and a max payout of $7.75 if, in an imperfect world, FB stock landed perfectly on $190 at expiration.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits and feel free to click here to learn more about how to design better positions using options!
