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.
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.
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.
This article was written by Nicolas Chahine for InvestorPlace on Feb 16, 2017.