Earlier, Dan previewed Facebook earnings. Similar to what we said in AAPL yesterday, it’s difficult to pick a direction into a binary event like Facebook’s earnings. But this is a widely held stock, and knowing how to position with options against long stock or in lieu of stock entirely can be quite beneficial and profitable, while defining risk.
So let’s look at Facebook stock like we did AAPL but knowing that the set-up is quite different with FB at all time highs:
Hedge: against 100 shares of Facebook ($122)
Buy the July29th 120/110 put spread for 2.75
- Buy 1 July29th 120 put for 3.20
- Sell 1 July29th 110 put at .45
Rationale – For about 2% of the underlying you get protection of 7.25 down to the 110 support level. That means in the case of a sharp decline on earnings you can save about 6% in losses in your stock. And those that would like to add to their position at or below 110 can do so while lowering their cost average with the put spread protection. The ideal situation is that Facebook is much higher, more than the 2.75 spent. And the losses on the hedge are worth the money spent.
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Yield/Leverage vs 100 shares of Facebook ($122)
Buy the August 130/133 1×2 call spread for a .20 credit
- Buy 1 Aug 130 call for 1.40
- Sell 2 Aug 133 calls at .80
Rationale – This is a supercharged over-write that is mostly likely nothing done and you collect the .20. But if Facebook is above 130 (which is in line the with the implied move) you have the chance to add up to 3.20 in additional leverage. If the stock is above 133 on August expiration the profits on both your long stock and the leverage stop, but at an effective price of 135.75. And like we said in AAPL yesterday, it doesn’t actually mean you need to be called away in the stock above that level. You can always take profits in the 1×2 and stay long the stock before they expire.
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In lieu of 100 shares of Facebook ($122)
Buy the August 110/125 – 135 call spread risk reversal for 1.50
- Sell 1 August 110 put at 1.00
- Buy 1 August 125 call for 3.00
- Sell 1 August 135 call at 50 cents
Rationale – This lowers the level of losses that can be taken on August expiration down to 110 (which is support) instead of immediate losses if the stock is lower on this earnings. You can be put the stock at 110 (for an effective price of 111.50) so it’s only for those willing to buy at that level. 111.50 is below the implied move. Above, if the stock is higher inline with the implied move this trade is profitable above 126.50, with profits capped at $135. So if there’s a wild breakout to the upside this can participate. The most likely scenario is that Facebook is within that 110 to 130 range, so it’s essentially risking $1.50 in most cases. But if the stock is off to the races (with no resistance above) this is a cheap way to participate. As far as trade management, if the stock is higher after earnings, the short put can be rolled higher to continue to finance the 125 calls.