By Greg Jensen
Back on August 31st I suggested a trade based on clues from the options market. I am not one to brag, but if you did buy Facebook (FB) at around $19.00 as suggested, you are probably feeling pretty good about it right now. Yesterday FB continued its roaring recovery to close up another 2.3% at $31.30.
The popularity of Facebook as social media was never in question, but their ability to make money was. Sentiment has changed and the company is now seen as having enormous profit potential. It does of course. Before the IPO, FB’s brightest minds were tasked with improving the product and the user experience. Once those same minds began to look for ways to monetize the phenomenon, it was inevitable that they would find a way. Long term, I am a believer. Facebook, like Google (GOOG) before it, has become a part of all of our lives. Like GOOG the transition from trendy tech to a mainstream company hasn’t been plain sailing. Some of the attempts to make money have been clumsy, leading to some backlash, but the network is still enormously popular.
If you did buy the stock cheaply, however, and have more of a trader’s mindset, it may be time to take some profit. I certainly wouldn’t be buying it here. This isn’t a view based on detailed fundamental or technical analysis, just common sense. Again, long term I think the stock is a decent investment, but there could well be a correction coming.
Here’s why; There are an awful lot of people, mainly small investors but undoubtedly some larger ones, that own the stock at the same price, $38. With the collapse that followed, it is easy to forget that the IPO was incredibly popular. Facebook increased the number of shares offered by 25% two days before the debut, and that $38 offering price was at the very top of the indicated range, despite a weak market.
It is hard to find someone that will admit it, but I would bet that there are a lot of people who were delighted to get an allocation of FB shares during the IPO and still have them. You can be sure they are all watching these levels with trepidation. Having stuck it out through a collapse of over 50%, none except the incredibly stubborn will want to miss the chance of a cheap cut.
Should the recovery stall, therefore, I would expect the correction to be swift and possibly severe. Selling now with a view to buying back below $25 makes sense to me. Alternatively, a bearish option spread or even simple out of the money puts could be used by those without stock to play the move. If buying puts, remember that this is a short term view, so going out further than March expiration makes little sense.
As a rule, small investors don’t move the market, but a small army of them can. Usually I form opinions based on numbers and solid evidence. Sometimes, however, a healthy dose of common sense can work wonders.