I have had a good run of trades with Facebook Inc (NASDAQ: FB ), typically because I go long into swoons. Instead of tying up sizable capital owning Facebook stock, I use the options markets to capture the upside opportunities.
Source: Via Facebook
Yes, options can be dangerous, but just like any type of investing, without risk there is no return.
Fundamentally, FB stock should do well in the long term . Management has proven that it can execute on its plans and adjust them when necessary. It had a few missteps in the beginning but has since been on rails.
The company boasts more than a billion users in an exciting arena, so Facebook stock should sustain a rosy long-term outlook.
How to Trade Facebook Stock Right Now
The Trade - Bullish Facebook: Sell Dec $95 puts for $1.75 per contract. So for 10 contracts, $1,750 goes into my account. But the money is not mine until the trade expires worthless for maximum gains or until I close the position. From current FB prices, this trade has a 90% theoretical chance of success with a 28% buffer from current price.
It sounds like free money, and it is as long as Facebook stock stays above my strike sold. If FB falls below my strike, I would be put the stock at that price. If that happens, anything below $93.25 per share would accrue losses for me.
Personally, I don't mind owning Facebook stock at a 28% discount from here.
By selling the puts, I committed to buying the stock in the event that the Facebook stock price falls below my strike. In essence, I'm selling someone a lottery ticket. They hope FB would fall more than 28% so they can start profiting. My plan is that Facebook stays on track through 2017.
I could spend 10 cents buying sacrifice Jun $90 puts to guard against a market crash to help me sleep better for the next few months.
I only sell naked puts if I am willing and able to own the stock. So for those who not comfortable committing by selling naked puts, I can change the trade to being a credit put spread instead. This would considerably mitigate the risk.
The Alternate - Bullish FB: Sell a Dec $95/$90 credit put spread on FB for 50 cents per contract. The buffer is about the same and yield would still be a respectable 10%. In this case, the maximum risk is defined to the width of the spread less the premium I collect.
I am not required to hold my trades through expiration. I can close them at any time for partial gains or losses.
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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