I have two speculative stocks this year that I am alternating. Lululemon Stock (LULU) and Facebook Stock (FB). Both have been terrific for my portfolio as the returns are far beyond what many stocks provide due to their high volatility and larger put premiums. What has been excellent this year is that when one stock is doing well, the other stock has been doing poorly. This has made it easy to determine when is the best time to be selling puts against which stock.
Facebook Stock Recovery
Facebook Stock has recovered from its disasterous IPO. For whatever reasons the IPO was simply a disaster, but thanks to revenue growth and outlook, Facebook Stock has recovered from the disaster and moved ahead.
Facebook Stock Support Levels
Now that the stock has been trading for over a year and a half, investors can get some kind of idea as to where support levels are in Facebook Stock. If we go back 6 months we can start right from when the stock finally recovered.
Back in July when earnings came out the stock finally made a good move and jumped to $34 from $26. The $34 level has quite a lot of support. On July 24 the day before the stock jumped, 82.6 million shares traded. On July 25 the day after the revenue and earnings announcement, 365.9 millkion shares traded and the stock closed at $34.36. From there the next level of support is at $37.
A small amount of support is in the stock at $44.50 but the $47 level has a lot of support including on Oct 31 when another huge volume day of 248.8 million shares saw the stock open at $47.16 and push as high as $52.00 before closing at $50.21.
The high in the stock to date was around the $54.80 on October 18 and 19 of this year.
Growing Short Interest
The short interest in Facebook Stock is growing again. The last time I looked at short interest in Facebook Stock was Oct 15 when short interest had fallen to around 31 million shares. As of the end of November short interest was back to 41 million shares which based on average daily volume is reasonably substantial. Obviously as this stock has been climbing many investors are betting the stock will fall again.
Twitter Versus Facebook
Unlike Twitter stock which is all momentum driven at the present time, Facebook Stock already has a track record with investors and a following of investors. Twitter Stock on the other hand is so new that there is no way to determine the extent of support from investors in the stock.
The question Facebook investors need to ask themselves is whether this social media giant has enough revenue projections to convince investors that the stock can break through $54.80 and stay higher. Since I have no way of knowing this, I believe there are trade possibilities for Facebook Stock at present that offer profit potential while avoiding losses through another plunge in the stock. A plunge that I think is highly unlikely, but which investors should always be aware of and plan for.
Can Facebook Stock break through and establish a solid new high?
The put premiums are excellent within Facebook Stock but my trades this year have all worked because I have stayed at or below support levels.
Short- Term Trades
For some investors the trade they like is the very short. That may mean looking the at Dec 21 options which will expire in just 8 days. This could end up with an investor selling the $48 put strike for Dec 21. It pays 1% for less than two weeks of risk and as it is above support at $47 it does have more risk.
To counter some of the risk an investor could consider a put credit spread. To do this an investor could sell the $48 put strike for .44 cents, which is one strike above support and then buy the $45 for .12 cents. The return for this trade is then capped at .32 cents but considering this is less than two weeks, the return is decent for the risk taken.
For other investors, selling the $47 put strike for .27 cents and staying without protection for the next two weeks, returns 0.57% and $47 is right at support which could provide the strength needed to keep the stock above the $47 valuation for the next 8 trading days.
Personally neither trade for Dec 21 interests me.
Mid-Term Trades
I prefer larger premiums for a bigger dollar amount earned, to risk my capital in this trade and that will mean two extra weeks of risk.
My choice is the Jan 3 2014 options expiry period. The puts shown below expire is less than four weeks and fall through the holidays and the expected Santa Claus Rally at the end of December. During this trade period we have a short day on Dec 24, no trading on Dec 25 and Jan 1 and should also see a number of low volume days including New Year’s Eve. This helps mitigate some of the risk in the stock. For this extra time period and additional risk I think the put premiums are superior.
For the aggressive trade the $48 put strike is trading for .90 cents but even a little dip on Wednesday and this put will move quickly to $1.00 for 2% return.
To add a degree of safety, an investor can enter a put credit spread and buy matching puts to protect the position. For example, if an investor sold 5 puts at the $48 strike for .90 cents he could then buy the $45 put strike for .33 cents and put in place some protection. This spread would provide .59 cents of income or through a bit of patience could probably be boosted even more.
For my own trade I will be looking for a small dip on Wednesday and then selling either the the $47.50 or the $47 put strikes for Jan 3 expiry. If the stock dips enough I will be moving to the $46.
Tha above two are the options expiry periods I prefer. Whether Facebook Stock can break to new ground is anyone’s guess. Momentum and investor interest is what will drive the stock higher if it happens. Getting over $54.80 though could be tougher than investors think.
Whatever trade I enter into I will be closing my trade earlier than expiry, if I can captured 80% of the premium earned and/or there are signs that the stock may be about to fall and leave my naked puts in the money.
In The Money Covered Calls
Just as there are put trades that look decent, there are equally profitable covered call trades. However I have no interest in doing covered calls on Facebook Stock so I will not delve into them here. Suffice to say that if I was doing covered calls I would sell in the money covered call options to try as best as possible to guarantee that my shares were exercised away from me. No Long-Term Interest in Facebook StockI have no long-term interest in Facebook Stock. I only plan to keep selling puts against the stock to earn above average returns. When that is no longer possible, I will discontinue Put Selling the stock and move to a different stock on my watch list.
