In July, just before Facebook (FB) took another large step higher, I decided to cut my risk with the social media company and moved back to Apple (AAPL). My AAPL trade worked for me, but I could’ve stuck with FB and made money also. FB fell off my radar for a little while as I focused on other stuff and then I saw it fall hard in October with most other stocks. I missed the opportunity to get back in then, but it got me back to watching it again.
FB is off of its recent highs and dipped below its 10, 20, 50 and 100-day moving averages (all four of these are pretty close together, between $75.02 and $75.95). Yesterday, FB started to work its way higher and closed above its 20 and 100-day moving averages. This morning, FB opened above its 10-day moving average and shot past its 50-day moving average too. Technically, it looks like momentum has returned to favor FB again. Fundamentally, some could easily argue that the stock is overvalued with a trailing P/E ratio of 71 and a forward P/E ratio of 40. I can’t argue against that, except that it’s bring in gobs of cash (that’s a rough estimate) and still finding ways to monetize their properties.
Since it’s a volatile stock and has a hoard of pessimists trying to talk it down on a regular basis, the option premiums are fairly rich. While FB was trading at $76.42, I sold one FB February $72.50 naked put for $2.85 and received $284.20 after paying $0.80 in commission. I was going to make the trade at $2.80, but saw the stock coming down some. I entered my limit order for $2.85 and patiently waited for the order to come to me.
I lo0ked at the $67.50 and $70 strikes, but I don’t think FB will fall below its October intraday low of $70.32 and I opted to take on a little more risk, for a much better annualized return. I could’ve had a cushion of 13.50% or 11.01%, but I felt 8.85% is enough protection from a loss. If my four naked put contracts on UWM weren’t so far out of the money, I might have taken the path with less risk. I didn’t need to push my luck any harder since I have a potential return of 17.53% by selling nearly $4.00 out of the money. I would like to have had a shorter duration for the put, but I have so many other contacts expiring in January, I wanted to spread it out some.
FB Naked Put Risk/Reward Breakdown
- Potential profit: $284.20
- Potential return: 4.08%, 17.53% annualized
- Breakeven price: $69.66
- Downside protection: 8.85%
- Recent high: $81.16 on October 28
- Cushion from recent high: 14.17%
- Expected support: This week’s low was $74.42. If the moving averages I mentioned above don’t hold support somewhere between $75-76, this intraday low could serve as a reason for selling to stop. On November 20, FB hit $72.53 to mark the low since gapping lower at the end of October. This intraday low could also work as support. If there is a bigger momentum shift, I could see FB retreat all the way down to its October low of $70.32, which could bring its 200-day moving average into play as support too. The 200-day moving average is at $69.43 now and climbing slowly, so it’ll depend on how fast any sell-off hits the stock.
- Position close goal/limit: I’m going to try to take this trade all of the way to expiration, unless I can get out much earlier with most of the premium in my pocket. I’ll have to watch it closely to see if there is any major news that could sink it and change my outlook. From a technical view, FB has a long way to go before I’d give up on it since it can drop 10% and rebound 15% very quickly.