How To Trade This Elite Businesses Pullback
Earn Income Trading This Long Term Trend
The safe way to play the pullback in Facebook (FB) stock is buy selling an insured put option. (simply sell to open a put and buy to open a put creating a bullish spread)
Over the last 12 months Facebook grew sales by 19% to $79 billion with an amazing 32% profit margin. This profit margin allows the company to earn $19 billion in free cash flow. The company has a stellar balance sheet and shares are reasonably price at 18.4 EV/EBITDA verse the S&P 500 of 18.8.
The share price has fallen 17% from its recent high of $303 but they remain in an uptrend above the 200 day moving average.
Sell Put To Generate Income
Longer term investors could just go long the stock or long call options to try and catch a bounce in the stock which may earn higher returns but also takes more risk.
The safer option is to use puts to create income today with the potential to buy shares at a around today's price. Sell to open the February 19 $250 puts for $13 and buy to open February 19 $235 puts for $7. The trade will net you a premium of $6 or 2.4% of purchase obligation. For a 5 week trade you are generating a 24.4% annualized return.
This trade presents three potential outcomes.
If FB trades below $235 on expiration day both puts will be exercised and you will realize the full potential loss of $9 ($15 spread minus $6 credit received). This is a maximum loss of 3.6%
If FB trades between $250 and $235: you will buy 100 shares of stock at $250 each and the $235 put will expire worthless. Your effective cost basis will be $244 about 3% below recent trading prices. You will now own a great company at a reasonable price and can hold for the long term or use covered calls to generate additional income.
If FB trades above $250: you keep all the cash and free up capital for another trade. This ideal senior earns 2.4% over a 5 week holding period for a 24% annualized return.
Today is a great time to trade Facebook. Earn some good income today.
Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.
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