Name That Trade $FB: A Hoodie With A Collar

by Dan November 8, 2013 2:42 pm • Commentary

Earlier today (below) I highlighted what could be a developing technical set up in FB similar to what just occurred in TSLA over the last week or so, the dreaded “head and shoulders” top formation.  I obviously have no idea whether FB in the near term will share a similar fate to TSLA’s 30% drop from the all time highs since Sept, but while the psychology around the 2 stocks is very different the technical set up has a strong resemblance.

Last week prior to FB’s Q3 results a friend of mine who is an asset manager for high net worth individuals (not a trader) called me and asked for best way in the near term to hedge his long FB position that he bought earlier this year when stock was in low $20s (high class problem to have).  His main thought was that he had fabulous gains in a very short period of time, but frankly the quick appreciation made him nervous, leaving him with the idea that just like the stock shot up,  it had the potential to drop down in similar fashion on a fundamental mishap.  So he says to me….”You are the Options Action guy, what do I do here?? I don’t want to sell the stock and pay taxes, but I am nervous about a drop and would love to have some downside protection”.

So I laid out an almost cashless Collar on Oct 30th, the day of FB’s Q3 report:

FB Bought Nov 1st weekly 45/55 collar for .10 debit.   The beauty of the structure is that it allowed for $6 of upside, but also offered what would be deemed to be short term disaster protection below key technical support at $45.  So what do you give up for that protection, obviously the premium paid, which was minimal, and the upside above $55, or up 12.5% with 2 days to expiration.  To my friend this options overlay seemed like a lay-up with the stock up 100% from the 2013 lows.

So what to do now with the earnings news and commentary out of the way, but the stock lagging?  I still like the idea of collars, not for fundamental reasons because aside from broad market moves, I don’t see much between now and year end that could cause a precipitous drop in FB shares. But does the declining momentum, and this weeks rollover in some of the market leaders, the high growth momentum names like TSLA and other web 2.0 stocks make you nervous? They should, because just as these stocks overshot on the upside, they can do so on the downside.  And that would be the reason to collar some big winners at this stage of the year.

So if my friend called me today with similar fears of a drop, but this time for the reasons listed immediately above, then I would outline a similar structure as to before in Dec expiration.

Hypothetical Overlay: FB ($47.75) against 100 shares of long Stock, Buy Dec 43/52.50 Collar for Even Money

-Sell 1 Dec 52.50 call at 1.00

-Buy 1 Dec 44 Put for 1.00

Break-Even on Dec Expiration:

Profits: gains of the stock btwn $47.75 and 52.50, make up to $4.75, stock called away at $52.50 up 10%

Losses: btwn $47.75 and $44 lose up to $3.75, or up to 7.8%, protected below.

Trade Rationale:  You would do this overlay against long stock if you were more worried about downside and locking in gains in place of the prospect of continued fabulous gains.




Original Post Nov 8th, 2013:  Chart of the Day: Heads Rolled This Week – $FB vs $TSLA

For the smart guys out there, the most significant events of the week were fairly obvious – the EU lowering their growth forecast for the entire union, an unexpected rate cut by the ECB and the very unexpected positive surprise on non-farm payrolls here in the U.S.  But for some reason, while I find all that fancy macro stuff interesting, I admittedly couldn’t keep my eyes off of TWTR, FB and TSLA.

Since TSLA made an all-time high on Sept 30th of $194.50,  and since then has made a series of lower highs and lower lows that culminated this week with significant gap lower on big volume, on fundamental news.  The 6 month chart below shows what is in hindsight a textbook head and shoulders top formation, with $160 serving as the neckline.  For some technicians the biggest tell might have been the multiple closes at the end of Oct below the important short term momentum indicator, the 50 day moving avg (purple).

TSLA 6 month chart from Bloomberg
TSLA 6 month chart from Bloomberg

Scrolling some charts of other high-fliers, a similar pattern in FB caught my eye, where the stock had a similar parabolic run in the last few months.  The 6 month chart below in some ways resembles TSLA of late, consolidating below recent highs, seemingly making a similar head and shoulders pattern and now sitting right on the neckline, and importantly below the 50 day moving avg.

FB 6 month chart from Bloomberg
FB 6 month chart from Bloomberg

While there are few similarities btwn the 2 stocks, I am keeping a close eye on both as TSLA has been the poster-child for VERY speculative stocks year to date, while FB’s recent performance signals more mainstream investor interest at large cap growth at a reasonable price.  I would be more inclined to take a shot at TSLA on the long-side on a near term oversold condition and possibly press the recent weakness in FB for the potential for a downside gap below support possibly on some fundamental news, similar to the situation in TSLA this week.