Book 125% Returns On A Big Move In Facebook (FB)

| May 2, 2018 | 0 Comments

FacebookPerhaps no company has gotten more press lately than Facebook (NASDAQ: FB). The social media giant has mostly been in the limelight for negative reasons… namely the Cambridge Analytica scandal and data privacy concerns.

Investors were quick to jump ship when concerns over FB’s policies became headline news. The stock dropped from $180 to $150 in about two weeks. Since FB had previously been a resilient member of the tech stock elite, this drop certainly put downward pressure on the tech sector as a whole.

However, as is generally the case, the crowd overreacted in its rush to get out of FB shares. The company posted excellent earnings last week and beat Wall Street expectations pretty much across the board.

Facebook earned $1.69 per share compared to expectations of $1.35, and generated $11.97 billion in revenue compared to a projected $11.4 billion. And while those numbers are already impressive, more importantly, monthly active users jumped 13% and also beat expectations by 10 million users.

Essentially, the negative press around FB doesn’t seem to be having much impact on the users of the site, at least for the moment. As you can imagine, the stock jumped on the news. As a matter of fact, it gained back $15 the day after earnings.

So what’s next for FB? The stock is obviously in a very interesting place right now. As always, I like to look at the options market to get an idea on what sentiment is for the stock.

One interesting trade that stood out to me was the simultaneous purchase of the June 15th 180 call and 170 put, a trade known as a strangle. This strategy makes money regardless of direction – as long as the stock moves far enough. In this case, the buyer paid $8.80 (with the stock at $175) for the strangle, so it has to move to about $161 or $189 by June expiration to break even.

The strangle buyer purchased around 500 contracts, so it will generate $50,000 in profit per $1 above or below the breakeven points. On the other hand, he or she paid about $450,000 in premiums in order to make this trade.

Generally speaking I like using strangles to bet on big moves. However, around $9 is too much to pay even if there’s almost two months to expiration. Granted, a high priced stock like FB, which has been moving a lot, is bound to be a bit pricey.

If you like the idea of this trade but don’t want to spend the money, you could turn each side of the strangle into a vertical spread to save money. That would basically morph the trade into a long iron condor… not a very common strategy (iron condors are usually short), but not a bad idea in this situation.

For instance, by selling the 165 puts and 185 calls in June (against the long 170 put and 180 call) you would cut about $5.60 off the price of trade. It would reduce your premium cost to $2.20 ($8.80 – $5.60) but also cap your profits at $2.80 ($5 strike gap minus $2.20 cost).

Still, you’d be able to make about 125% on the position (max) while reducing your cost of the trade by about 75%. That seems like a reasonable trade off to me.


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Category: Options Trading Strategy

About the Author ()

Jay Soloff is an options analyst with Investors Alley.