Call Options Or Put Options On Facebook (FB)?

| December 26, 2012 | 0 Comments

FB OptionsFacebook (FB) runs the largest social networking website in the world.  A whopping 845 million users visit the site every month.

FB currently trades for $26.55 per share.  The shares are down 41% from the post-IPO high of $45.00.  However, FB has rallied 51% from the 52-week low of $17.55.

Is this an opportunity to buy call options on FB after an analyst upgrade?  Or should you buy put options on FB as it runs into a PR nightmare? 

The bulls make a convincing argument…

FB was the most high profile initial public offering in recent memory.  But the stock didn’t live up to the hype.  It quickly tumbled more than 60% from a post-IPO high of $45.00 in May to a low of $17.55 in September.

The mistakes FB and the investment banks that handled the IPO are too many to list.  And the stock quickly fell out of favor with investors after FB CEO Mark Zuckerberg claimed profits weren’t his primary concern.  Those mistakes were compounded by the company’s inability to deliver a plan to monetize the quickly growing mobile internet segment.

Thankfully, Zuckerberg has changed his tune.  It seems he realized that telling investors he wasn’t concerned about profits wasn’t the message everyone wanted to hear.  And FB is demonstrating they can make money off of users who access their site with mobile devices.

Put simply, FB has dealt with the two big problems that dragged the stock down after the IPO.  In fact, analysts are beginning to upgrade the stock as mobile revenue growth accelerates. 

These positive developments should lead to more upside in the stock in the weeks ahead.  

But the bears have a compelling case as well… 

The recent rebound in FB’s share price from $17.55 to $26.55 needs to be taken with a grain of salt.  Don’t forget the shares are still down 30% from the $38 IPO price.

More importantly, the company still faces challenges in converting the millions of FB users into profits. 

In their search for new ways to generate revenue, FB could alienate their users.  If they lose their place as the dominant social networking site, the results would be disastrous.

In just the past few weeks, FB has had two major PR missteps. 

First was the Instagram photo-sharing blunder.   The company has been sued in a class action lawsuit for changes to their terms of service. 

Then there’s the announcement FB could begin charging users a dollar to send a message to anyone that’s not a friend on their site.  And it’s not likely to receive a warm reception either.

If Facebook users revolt against the company’s attempts to make money, the positive developments that have fueled the recent rally in the stock could blow up their face.  And the stock will come crashing back down.

If you think the bulls are right, take a look at buying the FB January 2013 $27.00 calls for around $1.20.

If you think the bears are right, take a look at buying the FB January 2013 $26.00 puts for around $1.00.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.