4 Options Trading Strategies For FANG Stocks

| September 29, 2017 | 0 Comments

FANGAfter a period of relative weakness, the FANGs are showing their teeth again

No doubt, investors are aware the FANG market barometer has been rather toothless of late. But based on our chart work and using options spreads to improve one’s chances of success, there’s reason to be bullish on Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc(NASDAQ:GOOGL).

FANG stock have collectively enjoyed a fantastic 2017 in both relative and absolute terms. But in recent months some of that enthusiasm has definitely worn off. Bottom-line, while the broader averages have continued to climb to new highs,  the price charts of FB, AMZN, NFLX and GOOGL shares fail to show that same appetite on the part of investors.

The good news is the recent relative weakness in FANG could be close to finishing as gains have been consolidated and overbought conditions worked off in the process. That’s not to say shares of Facebook, Amazon, Netflix or Alphabet will go up, but rather, each constituent offers supportive evidence on their price charts for higher prices.

Bearing that in mind, let’s take a look at FB, AMZN, NFLX and GOOGL individually and offer limited-risk options spreads that fit with our outlook on FANG.

FANG Stock #1: Facebook (FB)

Facebook stock has been looking a lot more like a “hold” than the popular ‘buy’ recommendation supported by 41 of 45 analysts issuing opinions on shares. Ultimately, the wavering price action is likely a good thing for bulls as its given Facebook shares some time to digest hefty year-to-date gains approaching 50%.

Now and with late news Friday Facebook’s CEO Mark Zuckerberg is abandoning an unpopular stock reclassification plan, the announcement could prompt investors to ‘like’ FB stock again and break shares out to the upside from a two-month long flat base pattern.

Mind you, I haven’t always been a bull on FB stock, but the tenacity to hold onto and digest gains laterally has been impressive and demands our respect. Reviewing the options board for this FANG constituent, a November $175 / $185 / $195 call butterfly looks interesting. With FB at $170.54 and priced for $1.75, the spread carries the equivalent of around 1% stock risk.

The bullish targeting allows for a nice size profit range from $176.75 to $193.25 at expiration with an outsized gain of $8.25 possible at $185.

The biggest consideration with using this type spread and you’re really liking FB stock is if shares rally too strongly. Bottom-line, above $195 the spread collapses to $0.00 at expiration. Given that’s another 14% above this FANG stock’s already strong performance in 2017; personally I like those odds of the butterfly finishing in-the-money.

FANG Stock #2: Amazon (AMZN)

Our next FANG stock is Amazon. I think we can safely assume most active investors are well aware of AMZN stock’s short-comings as it looks to grow itself into the United States of Amazon.

But there is support for shares of Amazon as well. A recent corrective move of 13% and current testing of an uptrend support line is a fairly decent spot for bulls to pick up shares — or better yet, a more risk-averse spread using AMZN stock’s options market.

Bottom-line, if the testing fails to hold, the recent 13% correction may not prove so lucky for bulls. Our analysis suggests AMZN’s next meaningful support zone won’t be challenged until $775 to $850 and a good deal lower than current prices.

As this relates to positioning in this FANG stock, after reviewing AMZN stock’s options board I favor the October $970 / $980 bull call spread. With shares at $955.10 the vertical is priced for $3.40 and offers a max payout of $6.60 if AMZN is able to move off support and rally by just more than 2.5% into expiration.

On the downside in AMZN stock, if shares fail technically, the low and certain risk is a great benefit without having to worry about potentially much larger losses if our forecasted support area comes into play.

FANG Stock #3: Netflix (NFLX)

Shares of Netflix have been on a tear the past month. The price action has helped push the streaming video on demand or SVOD giant to gains in excess of 52% for 2017 and sets up a challenge of its July all-time-high of $191.50.

Boutique investment outfit Buckingham Research sees the test, without saying as much, as a win for NFLX bulls. This past week the firm initiated coverage with a buy recommendation and price target of $214. The outlook is based on expectations NFLX will produce stronger-than-expected subscriber growth and expanding operating margins.

Technically speaking, the run-up in shares puts NFLX stock in a cup or V-shaped base formation. The price extension is slightly risky as it also sets up a potential double top, which could draw in profit-taking and even bearish shorts. For a long NFLX stock position, I’d personally wait for a bit of consolidation on the price chart. Alternatively, using a modified bullish fence is a favored strategy that might be considered appropriate today.

With shares at $187.35 a bullish trader can buy the October $195 / $200 bull call spread and sell the October $180 / $175 bull put spread for even money. Risk is limited to $5.00 if the currently out-of-the-money put vertical goes fully in-the-money were shares of Netflix to drop by 6.6% into expiration.

On the upside, this combination affords the bullish trader a free bull call spread. Thus and best case scenario, if NFLX stock rallies by 6.75%, a profit of $5.00 is captured at expiration. With earnings built into this play and if NFLX’s history of volatile reactions is any indicator, this limited-risk strategy is a smart way to position.

FANG Stock #4: Alphabet (GOOGL)

The last of our FANG stocks is GOOGL. Shares were up .85% this past week and outperformed the broader averages, but have lagged over the past few months after establishing its year-to-date and all-time-high back in June.

Off the price chart, news of Alphabet’s deal to purchase part of HTC’s smartphone assets came head-to-head with a challenge of GOOGL stock’s 50-day simple moving average. The initial reaction saw investors backing off on possible ‘flashback and valuation’ concerns; though collectively, Wall Street’s jury is still deliberating.

The weekly view of GOOGL points to a verdict as forthcoming. A converging uptrend and lateral support line coupled with a flattening and supportive Bollinger Band suggest the bulls may re-enter this FANG stock shortly, but I’d personally wait for modest price confirmation.

In our estimation, a move through the recent high of $958.33 would go a long way towards the bullish trend in GOOGL stock reasserting itself. As the weekly chart also hints at, if immediate support fails to hold a much larger decline is certainly plausible and not a situation I’d be comfortable trying to buy into too quickly.

Bearing that in mind and after reviewing the GOOGL options board, I like approaching a long position in Alphabet using the November $1000/$1015 bull call spread if the stock can reclaim $958.33. By waiting on technical confirmation, the vertical is estimated to cost $3.50 to $3.75 compared to Friday’s fair value of $2.75. 

Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. This article was originally published on September 25, 2017.

 

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Category: Options Trading Strategies

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