On August 10th we took a look at Facebook (FB) stock and decided on a defined risk bearish trade that was looking for a mild pullback in the stock from where it currently is (about 50c lower at initiation. Here was the initial trade some rationale:
While options prices look cheap, we are in a fairly slow moving market in the dead of summer, and owning even cheap options could prove to be expensive even if one is gets the direction right. To help offset decay one might consider calendars, or butterflies. In this instance I like a put butterfly to play for move in the next 5 to 6 weeks back towards the mid teens in the shares:
*Trade: FB ($124.85) Buy Sept 125 / 115 / 105 Put fly for $2
- Buy to open 1 Sept 125 put for $2.85
- Sell to open 2 Sept 115 puts at 50 cents each or total $1
- Buy to open 1 Sept 105 puts for 15 cents
The stock is essentially unchanged from that level. So like we said, our worry was Summer Doldrums and that’s why we chose a put butterfly to try to make that as cheap as possible and be realistic in what area we were trying to target (profits below $123.)
So now with the stock just above 125, this trade remains out of the money and worth less than what we initially paid at around 1.35 (vs a 2.00 cost basis). But we’re going to be patient here as we still have a few weeks left on this trade. Like I said, our breakeven on the downside isn’t too far away. It would only take a few down days to be in business.
However, there are two things that could test our patience. The most obvious would be new highs in the stock. We’d have to cut losses if the stock rallied from here towards the earnings highs around 128. The second would just be the continuing decay if the stock (and the broader market) goes sideways after Labor Day.
On the downside 120 seems like a realistic area were we to see a pickup in volaitlity in the market and a sell off that lasted more than a day. That is currently the 50 day moving average and at that spot this trade would be a nice profit:[caption id="attachment_65986" align="aligncenter" width="612"] FB from LiveVol Pro[/caption]