Since tagging a new all-time high at $110.65 in early November, Facebook (FB) stock has gone night-night. Apparently it’s nap time at Wall Street daycare and FB stock is simply exhausted after such a torrid run this year.
I suppose a bit of a rest is well deserved though. I mean, Facebook is the first member of the FANG gang.
The social media titan looks to end the year up about 35%.
Someday — any day now, really — FB stock will awaken from its slumber. Those who can time the awakening will score profits aplenty with the right strategy. I’ll suggest just such an idea below. But first, let’s dig deeper into the volatility snooze.
Perhaps the easiest way to illustrate the ongoing volatility crush in Facebook stock is via the popular Bollinger Bands indicator. Consider these bands a volatility envelope which contracts and expands based on the amount of movement in the underlying stock. When volatility is receding, the bands squeeze closer and closer together. Like a coiled spring, Facebook stock is storing energy … soon to be released.
That energy storm generates a breakout in FB, bringing profits to those on the right side of the volatile move.
To illustrate just how close the Bollinger Bands have become for FB stock, the accompanying chart has a Bollinger Band Width indicator in the lower panel. The upper and lower band sit a mere $4.29 apart, which is typically the tightest the bands get before a volatility surge.
Bottom line: the Bollinger Bands are signaling a breakout is looming.
The FB Volatility Play
If, like me, you think the breakout will be to the upside in Facebook stock, you can initiate a bull call spread with the potential to double your money. To give adequate time for the FB stock price to undergo the requisite rise, we’re going to use March options.
Buy the March $105/$115 call spread for $4.30 or better. The max loss is limited to the initial $4.30 debit and will be forfeited if FB stock price sits below $105 at March expiration.
The max gain is limited to the distance between strikes minus the net debit, or $5.70, and will be captured if Facebook stock can rise above $115 by expiration.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
