Call Options Or Put Options On Facebook (FB)?

| August 14, 2013 | 0 Comments

FB OptionsFacebook (FB) is the world’s largest online social network.  With something like 900 million monthly users, there’s a good chance you’ve used Facebook or are a regular visitor of the site.

FB shares are trading at $37.02 and are up 39% for the year.  The stock’s up 111% from the 52-week low of $17.55 and is just 6% below the 52-week high of $39.32.

Is this an opportunity to buy call options on FB with the company finally starting to meet expectations?  Or should you buy put options on FB due to unrealistic valuation investors have put on the company?

The bulls make a convincing argument…

FB is finally coming into its own.  Advertising is really starting to ramp up on the company’s site.  And, it’s most significantly increasing on the wildly popular Facebook mobile app (over 100 million users).  In fact, mobile ads comprise 41% of the company’s advertising revenues.

Moreover, the company is soon going to be offering video ads to advertisement buyers – which are both high priced and generally get good results from consumers.  Analysts believe these 15 second video ads could cost anywhere from $1 million to $3 million.

In addition, the company just announced a partnership with OpenTable (OPEN) which will allow Facebook mobile users to reserve tables at restaurants.  That means 20,000 restaurants will have Facebook pages with quite a bit of traffic sure to follow.  And, it’s just another way FB is adding both users and sources of advertising to their growing online behemoth.

But the bears have a compelling case as well… 

FB shares are currently trading at a P/E of over 185.  And that’s not even with the stock back up to the IPO price.  How well does the company have to do to actually meet investors’ lofty expectations?

After all, the company’s primary revenues come from advertising, which is notoriously fickle.  It’s taken longer than expected for Facebook to show any significant advertising growth and any blip in the growth will likely cause investors to bail in droves.

Finally, social media users have long been very resistant to advertising.  It will be an extremely difficult balancing act to not lose users through invasive advertising, but keep up enough ad revenue growth to appease investors.

So is FB’s recent growth a buying opportunity, or are expectations too high to justify the stock’s lofty valuation?

If you think the bulls are right, take a look at buying the FB October $40 calls for around $1.00.

If you think the bears are right, take a look at buying the FB October $35 puts for around $1.25.

Yours in Profit,

Gordon Lewis

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.