Yesterday a lot of analysts were pointing out that Facebook Stock (FB) instead of joining in the big stock market rally, was instead declining. A lot was made out of yesterday’s decline in FB Stock but today RBC Capital has given the stock an outperform rating and indicated their research points to the stock reaching $160 in 2016.

Facebook Stock Price Up 40%

Over the past 12 months Facebook Stock price is up 40%. If RBC Capital is correct at $160, that means there is still another 40% to 45% of growth left in the stock this year.

Facebook Stock Price History – 12 Months

The chart below shows the past 12 months for Facebook Stock. There are three major support levels in the stock.  The first is down at $80. That was why when the stock fell to $72 on August 24 it was a screaming buy. That day the stock was down 10% below strong support. The other two levels are the $90 valuation and the $105 valuation at present remains the last level of support for Facebook Stock.

The chart below include the Accumulation-Distribution Technical Indicator which shows that since the August sell-off, the stock has seen steady and rising accumulation and volumes have definitely increased this year despite the stock already being higher by 40% over the last 12 months.

Facebook Stock- 12 Month Chart to Apr 14 2016

Facebook Stock- 12 Month Chart to Apr 14 2016

Facebook Stock (FB) – Trading Levels and Strategies

The technical outlook for the stock remains positive. RBC Capital’s estimate for Facebook Stock may be a bit high but with 1.4 billion users and advertising revenue climbing from all sources, Facebook Stock may indeed move a lot higher.

One thing we do know from looking at the chart is any dip to the support levels would make this stock a terrific buy. I think the chance of the stock reaching $80 this year is probably slim to none. But it could dip below $105, especially if earnings disappoint for the upcoming quarter. A dip to $105 would be a great buying opportunity. A dip to $90 even better.

Buying Call Options

For the more bullish investors a cheaper play would be buying call options either:

  • deep in the money call options or
  • far out of the money call options

Deep In The Money Call Options on Facebook Stock (FB)

With Facebook this morning trading at $111.45 I would want to pick up deep in the money call options out to January 2017 expiry and with Delta of 1.000, Gamma of 0.000 and Theta of negative 0.007. The goal would be to replace the stock with call options that will follow the stock valuation but cost about half as much as owning stock. As well the entry should be below the $80 support level to protect the calls from a total loss should the stock tank back to support levels.

For example if I bought the Facebook Stock (FB) $90 call options and the stock fell to $80 by year-end, my entire investment would be wiped out. The calls would expire worthless. However if I hold call options that are below support, I will still have some value left in my trade and can rework the trade back to profitability in 2017.

Facebook Stock (FB) Call Options

This morning the call options at 12:00 PM look like below. These are for January 20 2017 expiry. What I want to is balance off the amount of capital I need to hold against how much call premium I am willing to give up. All of these have good Delta, Gamma and Theta readings for a deep in the money call trade.

Facebook Stock (FB) $70 Call Options Strike

If I add together the Facebook Stock (FB) ask price with the call strike I can see how much premium I am paying for the call options. The $70 strike call options for example will mean I am in Facebook Stock at $113.60. Considering the stock is trading for $111.45, I will have paid out $2.15 of premium but the trade will only cost me $43.60 a share.

Facebook Stock (FB) $60 Call Options Strike

If I am willing to place more capital into the trade I can move lower to the $60.00 call strike which will cost $52.85 for the call option which means I am in the stock at $60 + $52.85 = $112.85. This is a difference of 75 cents but will need $9.25 per share in additional capital. So for $9.25 I am closing to where the stock is currently trading at $111.45.

Facebook Stock Call Options for Apr 14 12:00 OM

Facebook Stock (FB) Call Options for Apr 14 12:00 PM

Facebook Stock (FB) Out Of The Money Call Options

The other trade worth considering would be to buy far out of the money call options for January 20 2017 expiry. When buying out of the money call options because you believe a stock is moving higher, you have to balance out the cost of the option and the chance of a complete loss to the trade against where you believe the stock could end up.

In the case of RBC Capital’s outlook for Facebook Stock, they believe the stock will reach $160 this year. If I bought the $135 call strike it would cost $4.50 but if the stock reached $160 by December 2016, this call option might be worth $26.00 approximately for a gain of $26 less $4.50 = $21.50. This would be a return of 477%.

If the stock never reached this high the return would be zero and the loss would be $4.40 per share. On 1000 shares or 10 call contracts the loss would be $4500. On the other hand if Facebook stock reached $160 by December, the gain would be $21,500.00.

Facebook Stock Call Options Far Out Of The Money Apr 14 2016

Facebook Stock Call Options Far Out Of The Money Apr 14 2016

When buying calls in the belief the stock will move higher, balance is incredibly important. How much can you afford to lose? The $150 call strike for example would lose $2.04 per share if Facebook Stock failed to make it to $150.00. On 1000 shares the loss would be $2040.00. This is less than half the loss of the $135 call strike.

If Facebook Stock reached $160 by December the $150 call strike would probably be trading for $11.50. This would be a gain of $11.50 less $2.04 = $9.46. On 1000 shares this is a gain of $9,460.00 for a return of $463.7%.

You can see that the returns are very close in percentage earned, but the actual dollars made are much higher with the $135 call strike than the $150 call strike but the dollars lost if the trade fails is higher with the $135 than the $150 call strike. You can begin to understand what is meant by the term, balancing your trade.

Facebook Stock (FB) Upgrade Summary

There are other strategies that can be employed to this situation to profit from any run higher in the stock as well as setting up different levels of protection. What is key for all strategies is for investors to decide how much risk they are willing to assume to try to profit from an upgrade call from an analyst, no matter how much they themselves believe the stock could move higher.

In the case of RBC Capital’s upgrade outlook, $160 does not seem out-of-place, but to move from where it is now to $160 this year would require fairly substantial growth for the remaining quarters of the year. As I prefer to trade stocks, even Facebook Stock, based on earnings and my own expectations of those earnings, I find it difficult to place capital at risk in a stock like Facebook Stock, for more than a few weeks at most which is why I plan to stay trading option strategies using the weekly options trades.


Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.

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