Name That Trade – $FB: Adding A Little Juice To Your Long

by Dan January 25, 2013 11:37 am • Commentary

Aside from AAPL, there are few stocks that we get more questions about than FB.  While AAPL spent the first 9 months of last year gaining hundreds of billions of dollars in market cap, FB spent the 4 months after its May IPO losing half its value and tens of billions of dollars in market cap.    In the time that AAPL topped out in Sept, since declining 36%, FB has rallied nearly 55%, but still sits about 18% below its IPO price and 30% below the prices that some investors paid on that fateful day.

FB has clearly benefited lately from the fact that the stock is still underwater, and many existing investors have a goal post to shoot for, $38. But perhaps due to the exodus out of AAPL you may also have many looking for the next double or triple in tech.

I have no real strong opinion whether FB will be a double or not from here, I am not a fan of this company, their products or their management, and feel very strongly that we will be speaking and thinking about FB in 7-10 years, much the way we think of MySpace now.  But I will add that I think there is a very strong likelihood that the stock sniffs that $38 IPO price again at some point this year… and this is where most of our questions lie from readers; how do I lever up my long stock position to get back to even??

We have detailed this structure in the past, and the options line up pretty well for zero cost 1×2 call spreads against an existing long stock position.  This is not a position that we have on.

TRADE STRUCTURE AGAINST LONG:

FB ($31.25) Buy Apr 35/38 1×2 Call Spread for Even Money

-Buy 1 Apr 35 call at 1.20

-Sell 2 Apr 38 calls at .60 each or 1.20 total

Break-Even on Apr Expiration:

-Profits of the stock btwn 31.25 and 38, make up to 6.75, btwn 35 and 38 make up to $3.  Above 38 you make 6.75 in the stock and $3 in the 1×2 call spread, but your gains are capped at $9.75 and your stock is called away, but you have effectively sold your stock at $41 for a ~30% gain.

-Losses of the stock below current levels.

TRADE RATIONALE:  Consider this structure as a sort of “Lance Armstrong of overwrites.” You are applying some serious juice to your existing position, but in this instance there is no added downside risk, and I assure you that you will not end up on Oprah’s couch.  I like selling the 38 strike as I think the stock should see some decent selling interest at that level, where those who have ridden the stock all the way down below $18 can now get out for even.