Stock Investment In Facebook Stock Through Put Selling Ladder

Facebook stock is surrounded with controversy. It is questionable how good a stock investment Facebook Stock may end up being. It is obvious that a lot of institutional traders are upset because for the first time in a long time they are the ones holding losses on an IPO that many smaller retail investors felt was overpriced. But Institutional traders are used to getting a quick bang for their buck. They always end up being able to buy more shares than small retail investors in any new hot IPO and then they get to dump the shares on smaller retail investors, usually in a matter of a few months for fast profits, once the stock is pushed up. It’s a quick trade and an easy way to make millions. Well their game didn’t work out this time and so they are wanting to sue anybody connected to what was obviously an overpriced issue.

Facebook stock as a stock investment

But for those investors who look upon Facebook stock as a possible stock investment what strategy might they want to consider.  There really isn’t any chart for the stock as it has traded for only a short time. However for those traders interested in Facebook Stock they might want to considered a Put Selling Ladder. A put selling ladder will spread out the risk among a number of strikes and reduce the risk of loss should the stock continue to fall.

Stock Investment in Facebook Stock

No charting tools will help with facebook stock. As far as a stock investment goes it's almost anyone's guess what level the stock will bottom out at.

Designed properly a put selling ladder could earn better than 9% for 5 months risk and put the investor into the stock around $19.00 which as a stock investment, might end up being a decent entry point.

Put Options Premiums Are High

With no one sure what price Facebook Stock will bottom out at, option premiums are presently at elevated levels making put selling highly profitable for those adventurous enough to consider Facebook stock for a stock investment. Option premiums should decrease within the coming months as volatility erodes within Facebook stock but for now this might be an interesting stock investment trade to consider.

To set up a put selling ladder on Facebook stock, perhaps December 2012 offers the best mix of length of time and naked puts premiums.

Stock Investment Put Selling Ladder for December 2012

Whether or not Facebook stock will end up being a great stock investment, I have not way of knowing because there is not enough economic details available at this point of trading since the stock has only been trading for less than a month.

But the December 2012 put option premiums are intriguing to say the least. If an investor wanted 1000 shares as a stock investment in Facebook Stock, an excellent put selling ladder might include these December 2012 put strikes:

2 naked puts each of:

Dec $23 naked puts for $2.65

Dec $22 naked puts for $2.35

Dec $21 naked puts for $1.95

Dec $20 naked puts for $1.65

Dec $19 naked puts for $1.35

The below chart shows the put premiums at the close on Friday June 8 2012. By using the put selling ladder risk of being assigned at what could end up being overvalued prices is reduced. As well, should the stock end up arond $21.00, only some of the puts would be assigned. This would let the other naked puts expire allowing the investor to sell puts again and at lower strikes to continue to protect his position as well as reduce his entry level into Facebook stock. By using the put selling ladder strategy to start the stock investment, an investor has spread his risk out and received additional protection.

Put Selling Facebook Stock

Put Option Premiums for Facebook stock as of Friday June 8 2012

This above put selliong trades would provide immediate income of $1990.00 or 9.4% for 5 months and if assigned on all put positions the total capital required would be $21,000.00 less $1990.00 for $19010.00 or a per share cost of $19.01 for each Facebook share.

At 19.00 this is about a 50% discount from the IPO original price. Whether even at $19.00 it is a good stock investment I have no way of judging, but it does seem reasonable consider the number of users of Facebook and the reported billions of dollars it has made in the past.

Based on present covered calls pricing, should an investor be assigned at $19.00 and the stock fall to around $16.00, an investor should be able to earn $1.00 per contract for 3 month out covered calls at $19.00 strike, which would reduce his cost further to $18.00.

With a return of 9.4% for 5 months work, this makes a compelling stock investment to consider.

Facebook Stock and A Credit Spread

For those who worry about their stock investment, they could consider buying a protective put but put premiums are highly elevated making the trade less than desirable. For example buying just 5 naked puts for Dec at the $14 strike would cost .45 cents. This would reduce the return from 9.4% to 8.4% but it would reduce the risk of loss on half the shares and at a reasonable cost. All 10 naked puts for .45 cents would reduce the return from 9.4% to 7.3% which is still a decent return for 5 months and would limit the total loss of the trade to $5000.00 less $1540.00 earned for a total loss of $3460.0o or 16.4%.

Put Selling and Rolling The Naked Puts Forward

Another advantage of selling these naked puts in groups of 2 and stretched from $23 to $19.00 is the ability to roll the naked puts down $1.00 and further out in time, should the Facebook stock continue to fall below $19.00.

In other words an investor would roll the:

Dec $23 naked puts to March $22

Dec $22 naked puts to March $21

Dec $21 naked puts to March $20

Dec $20 naked puts to March $19

Dec $19 naked puts to March $18

The best moment to roll each naked put strike forward should occur if Facebook stock continues to decline and each of the put strikes are reached. So if Facebook stock should fall to $23.00, the investor should immediately buy back the sold $23 puts and roll out at least 3 months and down 1 strike. Againwhen Facebook then reached $22, the investor should buy back the $22 naked puts and roll out 3 months and down 1 strike.

The naked puts rolling should be done for a net credit.

Stock Investment In Facebook Stock Through Put Selling Summary

With so much controversy and pressure on Facebook Stock to recover from these early losses, the chance of the stock falling much below $25.00 might be limited. Every investor must determine what constitutes a decent stock investment, but with a return of over 9% for 5 months, put selling Facebook Stock at present levels certainly does appear attractive.

  • The article is written to cover off a number of scenarios. If your strategy is to never own stock then an investor should roll out and down when the put strike is reached. By waiting too long put premiums will reach a point where the roll out and down will not generate enough credit to make the roll out profitable. If you know that your goal is no shares, then rolling is the way to go unless you want to take a loss and close the trade because your viewpoint on the stock has changed.
    Teddi