Apple Inc. (NASDAQ:AAPL) delivered yet another stellar earnings release and the optimism is buoying fellow tech stock Facebook, Inc. (NASDAQ:FB). Indeed, as I type, FB is up just shy of 2% in early morning trading. Moving forward, however, the tell will be how Facebook stock deals with its price gap.
On a side note, I consider the Nasdaq’s inability to rally today as the latest in a long line of evidence that this market lacks any momentum whatsoever. If this tech-heavy index can’t rise on the heels of a surge in its largest holding, then when can it rise?
Back to Facebook. Today’s pop is carrying the stock directly to the price void that was created by the March 19 down gap. The overnight whack knocked FB from $185.09 to $177.01 leaving an $8 hole that has yet to be filled.
And therein lies opportunity. Consider $185.09 a vacuum that could suck the stock higher if prices enter the void.
The gap lower on Jan. 12 is instructive. Once prices began to recover, the stock rallied rapidly to close the gap. While the current setup may not rip as swiftly (see the lack of market momentum mentioned earlier), I think betting on higher prices if FB can take out today’s high ($177.83) makes sense.
It’s also worth mentioning Facebook is now back above all its moving averages, which means it’s now recovered the high ground. While some additional backing-and-filling may be in order before the gap fill begins in earnest, prepping a trade and setting an alert at today’s high is smart.
How to Play the Facebook Gap Fill
To more fully capitalize on a recovery to $185, let’s consider using FB options. Buying the July 180/185 call spread should do the trick. Right now you can purchase it for $2.05 (but the cost will be more if you wait for a break of today’s high as your trigger). The risk is limited to the initial debit, and the reward is $2.95.
I’d consider taking profits early if Facebook stock tags $185.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
