E FB Offers 31.58% Return In 56 Days

A few weeks ago, I watched an excellent video of Carter Worth on CNBC discussing FB stock. He was a committed seller of the stock for some very sound technical reasons.

FB has certainly had a rough time of it lately but it has bounced quite well off the lows. That leads me to ask, is it time for the next down leg?

On the chart, the 50-day moving average has just crossed below the 200 days, which is commonly known as a death cross. Generally not a good thing if the name didn’t give you a hint.

With both the 50 and 200 sitting just above the current price, FB may have trouble getting above that level in the short-term.

Traders, who believe the bounce in FB may stall here can achieve high returns via a bear call spread.

One trading opportunity for those traders with a bearish bias is a bear call spread using the $180 strike as the short call and the $185 strike as the long call.

As of April 19th, this trade offered a 31.58% return on risk over the next 56 calendar days when using the June 15th expiry.

The 200-day moving average is currently at $173.60, and this could provide resistance on any further advance, so this trade represents a good risk/reward for those betting that FB will struggle to reach the $180 level.

The maximum profit on the trade would be $120 per contract with a maximum risk of $380. The spread would achieve the maximum 31.58% profit if FB closes below $80 on June 15th in which case the entire spread would expire worthless allowing the premium seller to keep the $120 option premium.

The maximum loss would occur if FB closes above $185 on June 15th which would see the premium seller lose $380 on the trade.

The breakeven point for the bear call spread is $181.20 which is calculated as $180 plus the $1.20 option premium per contract. Keep in mind that due to the bid-ask spread, you may not be able to get filled at these prices.

FB reports earnings on April 25th so implied volatility is high and there is a risk of a big gap up if the market likes the result. It’s a risky trade, but the rewards are there for the brave trader who thinks FB won’t rally much further.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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Gavin McMaster 1 year ago Author's comment

Working well so far