Facebook Stock And More Put Selling and Trading Options Questions

More Facebook Stock Put Selling and Trading Options Questions from a couple of forum members. Rather than reply on the forum I thought I would cover off these questions in an article for all readers to follow.

Facebook Stock Question

Selling Facebook Stock Naked Calls and Buying Puts For Protection

“I also sell puts on FB Stock. My current position is short FB Stock Jan13 25 Put @ $2.34. With the earnings disappointment, I’m thinking about buying puts using part of the option premium received to hedge the current position.

Your idea on FB weekly options is to sell call for the up days. Do you think it’s also wise if I buy puts instead of selling calls? Due to my limited account size, I cannot sell naked call right now.

Facebook Stock Question 1 Answer

I think it is important to ask yourself what is the downside in Facebook Stock. In my valuations I pointed to the mid-teens. You can read that Facebook Stock article here.  But after reading the e-mail sent to me this morning from an analyst which you can read here, watching the movement of Facebook Stock this morning, reading the quarterly results which you can find through this Facebook Stock link, I have to question how low can Facebook Stock go. In particular something not mentioned by a lot of analysts and financial blogs is the number of shares held by institutions. They will be very reluctant to take losses on their holdings.

Ask Yourself What Type Of Stock Investment Is Your Facebook Stock Put Trade

To answer your question and many more emails that I received, consider the 4 step approach I have outlined several times on my website. Right now the important question is what kind of Stock Investment do you want with your Facebook Stock naked puts? Are you going to eventually own shares at a discount or do you want to earn profit purely from selling puts and have no desire to ever own shares. Forget about today’s activity and instead think about the underlying company, its prospects and your own outlook for Facebook Stock and the type of investor you want to be. This all comes back to having a plan and the importance of strategy.

Once you have decided on the answer to this question, then move on to some strategy ideas below:

If You Want To Own Facebook Stock

If your goal was to own Facebook Stock but at a discount to where it was trading when you originally sold the January $25 puts, then you can:

1) Do nothing and be assigned. Then sell covered calls. Your stock price of $25 less $2.34 puts you in Facebook Stock at $22.66, which is certainly a decent entry price. If the stock fell to $19.00, you will still be able to sell covered calls and work yourself out of this stock.

2) Don’t take ownership even in January, if the stock is below your $25 strike and roll your January $25 strike further out in time and lower for a net credit. Remember you can roll your options indefinitely. If your January $25 is still in the money when December arrives, consider rolling them weeks before options expiry to avoid any possibility of early assignment.

If You Do Not Want To Ever Own Facebook Stock

If your goal is to never own Facebook Stock consider rolling your options early and roll them out and down for a net credit.

For example at the time of my writing this article, Facebook Stock is trading at $24.27 and the January $25 naked put is trading for $4.00 to $4.10. You did not tell me how many naked put contracts you are holding. If you have more than a small handful split them up. Wait until into September and October and if the stock is still below your naked put strike, buy back your January $25 and roll out some into March at $24 and others in May or June (whichever is available) at $23. Always roll out for a net credit no matter how far you need to roll.

Buying Facebook Stock Put Protection

As to your question on put protection. I had a lot of emails this morning on this question. You do not want to buy put protection yet.Let’s look at the Stock Technical Analysis chart for some answers. This is one of the steps in my 4 step articles.

Stock Technical Analysis on Facebook Stock

The chart below shows Facebook Stock since it started trading. Obviously the stock was overpriced and institutional investors should have considered that possibility when they bought into the IPO. Today marks one of the higher volume days. High volume days are great as they help to build support in the stock. Lots of sellers but for every seller a buyer. Facebook Stock has not broken through $22 yet.

A. The lower Bollinger band was broken with all the selling. I almost always recommend waiting until the stock recovers to the Bollinger band before considering buying put protection.

B. You can see today and yesterday mark high volume days for Facebook Stock. Remember, high volumes build support and resistance. The opening of the stock showed the highest volume day and there will be a lot of resistance to the stock moving much above $35.00 for a while. Facebook Stock has to prove itself now, before investors will push it beyond $35.00. But this creates a trading range which for option sellers or those trading options, makes for prime trading. Volatility may remain high and keep option premiums high.

Stock Technical Analysis on Facebook Stock

Stock Technical Analysis on Facebook Stock shows waiting for the Bollinger band makes sense

Take time out to check the slow and fast stochastic readings. For example today at the time of writing this article, both the slow and fast stochastic are showing that Facebook Stock is very oversold. While being oversold is no guarantee of a bounce, it is a sign that the pressure on the stock is at such a strong point, that it will bounce at some point shortly.

Facebook Stock and Slow and Fast Stochastic

The slow stochastic and fast stochastic for the afternoon on Facebook Stock show the stock is very oversold.

Once the bounce occurs watch the Slow Stochastic and Fast Stochastic for signs that the bounce is weakening. That’s the moment to buy your protective puts.

Investor Comments on Facebook Stock

“I have done well both selling out of the money puts and some strangles on FB since IPO.  With IV so high it possible to earn a decent return and still stay far enough out of the money (for me) to feel comfortable.  …I got a little too greedy being short the 27P going into earnings.  I will wait and see how tomorrow plays out and will probably sells calls if premiums/volatility remain attractive.   This isn’t a market or stock I feel comfortable doubling down on more puts.

Selling Naked Calls on Facebook Stock

Strangles have been excellent with Facebook Stock so kudos to this investor for spotting that. My article on strangles and straddles on Facebook Stock can be found here. I see no problem presently with the $27 naked puts and lots of opportunity to roll them and add naked calls to the trade. When trading options it is important to consider all aspects and strategies and combining strategies can pay big dividends.

Selling naked calls on Facebook Stock is straight forward if done properly. As explained above in the stochastic section of this article, you want to wait for the bounce and the run back up and then sell the naked calls. Investors worry often about naked calls which are really not that different from naked puts. The advantage naked calls have is that in general stocks tend to fall quickly but climb slowly. Since Facebook Stock has disappointed a lot of investors, the climb back to higher valuations is going to see resistance which will slow the move higher and allow for profitable naked call selling. Selling Call Options can be as profitable as Put Selling and sometimes, more so.

Doubling Down On Facebook Stock Options

As to the question of the market or stock, I can understand your concern on doubling down. Instead consider rolling your naked puts out and down as accomplishing the same thing as doubling down. There is no need to panic when a stock falls. Stocks move around a lot. It is different when an investor has sold puts at extremely high valuations (think Walmart Stock) or naked calls at low valuations (think Facebook Stock right now). These are positions that are difficult to rescue without additional capital.

Rolling Options Down and Out Makes A Lot Of Sense Strategically

But there is no need to commit more capital when rolling options up or down can accomplish the same strategy and for a net credit. Investors always worry about rolling their positions far out in time, 6 months or longer. But if the trade is sound then rolling makes a lot of sense.

The Market Is Not Scary

As to the market. This market correction has not been severe. If anything it has provided excellent opportunities for more income trades. When the market was moving higher in February, March and April, investors complained bitterly that option premiums were minimal, stocks were heading higher and there were little opportunities to get in and profit. That picture has changed but it may last only a few more weeks or even days. The higher highs and higher lows I have mentioned repeatedly since the start of June are a sign of strength. Europe is basically providing down days to let investors get in on the dips. Technically the market in 2007 was actually scarier than today’s market. For those investors who have waited since March 2009 for the “second shoe to drop”, someday it will happen but the opportunities that have been missed by not being in stocks since then are staggering. Aside from doubling my capital in the market recovery of 2009 I have earned 29.86% in 2010, 26.8% in 2011 and I am hoping to see 20% this year. Stocks are still the place to be and Facebook Stock remains highly profitable for Trading Options.