After a wild ride post-earnings, shares of Facebook Inc (FB) are poised to enter a period of consolidation.
Click to Enlarge On the heels of an impressive earnings report after the close on Jan. 27, FB stock rallied nearly 25% over the following four days, trading at an all-time high of $117.59 on Feb. 2.
FB subsequently gave back all of those gains over the next five trading days, dropping all the way back to the $97 support level as seen in the chart.
I had written in an earlier article that Facebook stock had past both Exxon Mobil (XOM) and Berkshire Hathaway (BRK.A, BRK.B) to become the fourth-largest U.S. traded stock by market cap.
FB stock has now fallen back to the number six spot, behind both Exxon and Berkshire. Warren Buffett is now bigger than Mark Zuckerberg once again.
From a technical perspective, FB has held support at the $97 level, bouncing sharply off that level on Feb. 9. Initial overhead resistance is at $107, with further resistance at the $115 area. Nine-day RSI is at 55.28, showing that Facebook is neither overbought nor oversold.
The options market, like myself, is decidedly neutral on Facebook stock. Implied volatility is currently in the 43 percentile, while historic volatility is still elevated with a 94 percentile reading. Option players are also thinking that the recent bout of volatility in FB will calm as well.
While a range-bound market diminishes the ability to generate profits from a stock trading perspective, defined risk option spread trades can be employed to benefit from an anticipated period of consolidation.
With Facebook stock closing at $105.20, I would look out to March and sell both an out-of-the money call spread and an out-of the money put spread to establish a neutral trade. This trade structure is known as an iron condor. These are the regular monthly March options that expire March 18.
Specifically, I would sell the FB March $115 calls and buy the FB March $120 calls for a 42 cents net credit while simultaneously selling the FB March $95 puts and buying the FB March $90 puts for a 50 cents net credit. The total net credit on the iron condor is 92 cents.
The short call strike of $115 is 9.32% above the $105.20 closing price of FB and is at the secondary resistance level of $115. The short put strike of $95 is 9.70% below the $105.20 closing price of FB and below the $97 support level.
The maximum gain is $92 per each combined spread, with a maximum risk of $408. Return on risk is 22.55%. I would look to close out the entire position (both call spread and put spread) if Facebook stock moves meaningfully above $115 or below $95, while looking to keep the initial $92 credit if Facebook remains well behaved.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
