For the past two months, Facebook Inc (NASDAQ:FB) has been consolidating near record high. This is in spite of recent corrections in other mega-tech stocks like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple Inc. (NASDAQ:AAPL). In an equity market this bullish, this usually means higher prices to come. I want to reset another long trade for that.
Although FB stock is now 30% higher than last November, it’s not overpriced. Fundamentally the stock may not be cheap, but it’s not bloated either. Its price-to-earnings ratio is more expensive than AAPL but it’s close to that of GOOGL and
Microsoft Corporation (NASDAQ:MSFT).
Click to Enlarge FB delivers strong growth, but doesn’t do this at the expense of profitability. Its net profit margin is much higher than all three other mega-techs in question.
Furthermore, Facebook’s management has proven to Wall Street that it’s capable of making big moves. So far they’ve been spot on. Behind strong fundamentals and crafty executions the future is rosy for this social media giant and I want to profit from it.
I am not the only one who thinks that, so I do worry a little about the risk of lofty expectations. But fundamentals should prevail in the long run. After all FB has the attention of over a billion daily active users and that is an asset that his hard to mess up.
So far, I’ve shared winning trades that had no out-of-pocket expense. This time with profits in hand, I want to extend my setup to have an upside bet as well.
FB Stock Trade Idea
The Upside Bet: Buy FB Sep $155/$160 debit call spread for $1.80. This is a bullish trade which has the potential to double my money through September.
I am not one to chase price targets not even into earnings. So to lower my risk, I will completely offset my out of pocket expense by leveraging the value in FB stock.
The Bank: Sell FB Nov $125 put and collect $1.80 to open. Here I have an 85% theoretical chance of success for maximum gains. However if price falls below my strike I would have to own the Facebook stock and accrue losses below $123. To mitigate the risk of selling naked puts I can use credit spreads instead.
Taking both trades means that I would be long Facebook into earnings for zero out-of-pocket expense. The worst that could happen is that price falls below $125 and I have to buy Facebook stock at an 18% discount from today’s level. Conversely, as long as price stays above $125, any premium that I capture from selling the September puts would be pure profits even if price meanders lower.
Investing is risky so I never risk more than I am willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
