Shares of Facebook Inc (NASDAQ:FB) have certainly shaken off the recent privacy issues hysteria. Facebook stock has now rallied over 20% since bottoming out at the $150 area in early April and is fast approaching all-time highs.
While the drubbing FB took following the Cambridge Analytica data leak was clearly overdone, the recent rally is also getting overdone as well. I look for Facebook stock to retrace some of the recent big gains over the coming weeks.
While earnings certainly beat on both the top and bottom line for Facebook, there are major some headwinds looming. Capital expenditures are expected to be $15 billion for 2018, which is at the high end of analysts expectations. Expenses are expected to grow over 50% as well as a definite drag on revenues.
Most importantly, daily and monthly active users look to be flat at best next quarter due to the greater privacy measures instituted following the Cambridge Analytica scandal. All these headwinds should impact revenue and earnings over the coming quarters.
Facebook stock is getting extremely overbought from a technical perspective. 9 day RSI is at 78.16, the second highest reading of the year. Previous instances when FB stock breached the 75 level proved to mark significant short-term tops in the stock.
FB is also trading at a large premium to the 50-day moving average of $170.40, another sign shares may be getting a little overextended. Facebook stock has been up six straight days, rallying nearly 7.5%. A pullback is likely on the horizon for FB.
In my previous piece on FB from April 12, I suggested a bearish short call spread with implied volatility (IV) expensive at the 79th percentile. IV in Facebook stock has now gotten cheap, trading at just the 30th percentile over the past year. It is now at levels last seen in mid-March, just before the stock got hammered.
This favors long volatility strategies when constructing option trades. So to position for a pullback in Facebook stock, a put diagonal spread makes sense.
Facebook Stock Options
Buy FB June $185 puts and sell FB May $182.50 puts for a $3.00 net debit
Maximum risk on the trade is the debit paid of $300 per spread. Maximum gain is realized if Facebook stock pulls back toward $182.50 by the end of the week. The trade is 22 deltas net short at inception, which equates to being short 22 shares of FB.
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.
