New Trade: Facebook $FB, Looking Past the Next Lockup

by Dan November 2, 2012 3:29 pm • Commentary

Here’s a preview of what I’ll be discussing on Options Action tonight on CNBC at 5pm:

On Oct 31st, FB saw it’s second lockup of IPO shares that became free to trade from insiders, and trade they did.  After gapping up 19% on better than expected earnings on Oct 23rd, the stock has since given back much of those gains, with most weakness likely corresponding to pre-emptive selling by non-insiders, and then the expected selling by insiders after the lockup.

On Nov 14th,  777 million shares become unlocked and then 156 million on Dec 14th, and then no more until May.

Let me be clear about this, I am not a fan of this company or their products, I feel very strongly that in 10 years many of us in the U.S. and Europe will be thinking about FB much the way we think about Myspace now, but that doesn’t mean there wont be short term trading opportunities.    The stock is oversold, and the least bit of good news could likely send the stock up to levels see right after earnings.

I want to make a short term bet that the stock holds $20 or so into the Nov Lockup but then quickly sees a bounce if and when the selling is not as extreme as some feel.  For  long stock, this strategy could also be regarded as a solid short term stock replacement trade in an effort to define your risk in what could be a volatile event.

TRADE: FB ($21.28) Bought the Nov17th 22/24 call spread for .39*

-Bought 1 Nov 22 Call for .50

-Sold 1 Nov 24 Calls at .11

Break-Even on Nov17th Expiration:

-Profits btwn 22.39 and 24, make up to 1.61, max gain of 1.61 above $24.

-Losses of up to .39 btwn 22 and 22.39, max loss of .39 below 22.


TRADE RATIONALE:  I tend to be a bit of a contrarian and when I look at a story that I don’t like, I often ask myself whether or not I would short it, in this case I would not, so I chose to look for a low premium way to express the contrarian view.

*I Put on a very small amount today as this will be a position I would like to leg into over the course of the next week as I expect further weakness if there is no company specific news….. I will not pay more than .40 for this spread as the 4 to 1 potential payout is one of the attributes I find most attractive. NO reason to run out and load up on this one this early, but think worth keeping an eye on it.