Facebook Stock is my speculative stock for this year. Short interest in Facebook Stock remains very high going into their earnings on October 30. The chart below from the NASDAQ shows the short interest since last October (2012) in Facebook Stock.
Short interest in Facebook Stock to Oct 15 2013
I have actually enjoyed trading Facebook Stock this year as my only speculative stock. I have little money at risk and have done quite well selling puts as the volatility remains very high in the stock. This has made selling naked puts far out of the money profitable and pretty easy.
Holding No Facebook Stock Puts Into Earnings
My style of investing is primarily Put Selling. At present I have no puts on Facebook Stock and going into earnings I have no plans to add any. When my goal is 1% profit for a month I don’t see the need to risk my capital at this time in Facebook Stock to try to pick up 1%. To date I have done well but going into earnings at this time could be a bit of a mistake. My choice if I was to sell puts would be the Nov 22 $40 put strike which today is around 1% and 18% out of the money.
Facebook Stock Strangle Versus Apple Stock Strangle
For the more adventurous a strangle is probably a better way to really profit but then as a lot of my investor friends found through Apple Stock yesterday, sometimes the premiums are too high and the strangle does not work out.
The Apple Stock Strangle
When Apple Stock released their earnings after hours yesterday, there was an initial after hours reaction but then the stock recovered. This morning (Oct 29) Apple Stock traded between $539 and $520. Some of my friends did OK with their strangles and others not quite so because of the cost of the strangle. Instead of doing a strangle I simply traded by naked puts at $505.00 buy buying them back when Apple Stock rose and then selling them again when it fell back. It was profitable and did not require me to gamble with capital which would have been exposed to higher costs if I had bought a strangle.
The Facebook Stock Strangle
The same problem surrounds putting in place a strangle on Facebook Stock. Below are the options, both calls and puts, that expire on Nov 1. This would be the better strangle play to put in place than the Apple Strangle primarily because Facebook Stock could surprise either way. The costs though in my opinion are still fairly steep. Facebook Stock would have to surprise strongly either to the upside or downside for a strangle to really generate terrific returns.
A lot of my investor friends have bought the $45 puts for $1.00 and the $55 calls for $1.20. I can see their reasoning and while I think it is probably a decent trade I think if you are going to trade and risk capital perhaps the $47.50 puts for almost $2.00 and the $52.50 calls for almost $2.00 are a better trade since the likelihood of those premiums moving might be a higher.
Option pricing for Facebook Stock Strangle.Click to enlarge.
More Gambling, Less An Investment
While I do believe the strangle strategy for a stock like Facebook Stock can do very well, I look upon the strangle at this point as more a gamble than an investment. With a stock I prefer a longer approach which is why I sell puts against big cap stocks. Facebook Stock being my only speculative trade has not really been much of a gamble for me. I have sold far out of the money naked puts since the stock push up over $35.00 and earned small premiums with little risk to my capital.
Facebook Stock Outlook
The biggest problem I see with Facebook is the infancy stage for advertising revenue that it is presently in. Google has a huge base of various revenue streams while Facebook is just starting out. It has a captive audience but not enough expertise yet to establish strong ad revenue. It will take time to grow its revenue into multiple streams so there could definitely be a surprise to the downside. As this company matures I would look for revenue to increase. If it fails to increase revenue than this stock will definitely have trouble.
The 6 month chart below shows the last GAP UP when earnings came out. The stock has pushed a lot higher in anticipation of higher earnings but with a PE of 189.5 times, I think the stock could sell lower even on good earnings unless the earnings surprise strongly to the upside.
I think the only put strike worthy of any kind of consideration is $40 as it is 18% out of the money at present and could be defended through a variety of rescue strategies.
Facebook Stock 6 month chart
Facebook Stock Into The Earnings Summation
Overall I can see the attraction of these types of stocks but I prefer looking at the end result. I think an investor should ask themselves what is the total outcome they could expect. Is this the type of trade where enough capital can be risked to actually earn a big enough return to make the risk worthwhile. To place even $10,000 at risk to try to earn $1000 may seem worthwhile but if I can risk $40,000 on a big cap stock and earn $1000 with less risk I would prefer to stay with the big cap stock.
This has always been the problem I have with speculative stocks. Not enough capital can be risked to really make a difference to my portfolio overall and for that reason I will be sitting out the earnings on Facebook Stock.