Take Facebook Inc (FB) Stock, Add Time, And Presto! Money.
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Facebook Inc (NASDAQ:FB) reported earnings Wednesday night, and as one might guess after a blockbuster report, shares are hitting new highs today. FB stock initially took a dip on the headline, but once investors parsed through the report, they decided the story that brought shares to these levels in the first place remains intact.
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It’s clear that Facebook stock is on a tear, and has good reason. The company is cranking on all pistons, and while I hate to chase stocks, I want to chase this company higher.
My way of doing it? Sell puts for income and let time do the rest.
After a 12-month rally of about 40%, most traders think FB stock is too high already. Not so. Facebook compares very well to mega-gaps such as Alphabet Inc (NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT). To boot, Facebook has better net profit margins and is gaining on the competition. Just because prices are higher than we’re used to seeing doesn’t mean the buying is overdone.
Don’t confuse this situation with high stock prices that chase future results. Facebook delivers excellent numbers here and now without much speculation of new things to come. I’d rather risk money on FB at 35 times earnings instead of chasing bloated values in Netflix, Inc. (NASDAQ:NFLX), for example. Facebook’s metrics are great, whereas in speculative bets like Netflix, we’d be betting more on expectations than current outperformance.
Technically speaking, FB stock trades in stages. Facebook has growth spurts, then falls a little to consolidate before the next wave higher. Even though I don’t have a dip here, I’m still OK to chase this performance higher. I won’t buy the stock because I want a buffer between price and risk. Instead, I’ll use options, where there are hundreds of strategies to like better than the ol’ “buy and pray.”
If my trade goes against the wrong way, I’d end up owning Facebook shares at a 20% discount from here. Tell me: Just how bad would that really be? As long as the macro pictures remains stable, I am confident that I will be able to manage the risk that comes with owning the shares lower.
How to Trade FB Stock Here
The trade: Sell the Oct $140 put naked and collect $1 per contract. I am betting that prices will be higher than my strike through early 2018. Otherwise, I have to own the shares and could suffer losses below $139.
For those who like more limited risk than selling naked puts, I can use spreads instead. These would provide the relative safety of more finite amount in danger yet would still deliver strong double digit yield.
The more moderate trade: Sell the Oct $145/$140 credit put spread where I stand about the same odds of success. So I’d be long FB stock, but I’d also have myself a healthy margin of error. The alternative would be to buy the shares in the open market and blindly hope they rally — and while Facebook’s a great company, I’ll remind you all that hoping isn’t a trading tactic. Meanwhile, my risk would be immediate, and I would have no room for error.
Regardless of how safe this may seem, investing is never guaranteed. So never risk more than you are 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.
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