Facebook (FB) won a major court victory this week when a federal judge threw back two complaints – one from the FTC and one from several attorneys general – for violating antitrust laws. Antitrust clouds have been looming over FB and its gigantic tech brethren for some time now, but these stocks keep ticking. FB responded to the news with an all-time high. But the stock was in rally mode long before the win, up 40% over the past four months. Love it or hate it, FB has an extensive roster of legal and lobbying talent who drag out, if not water down, the regulatory process … whenever that may be.
In the meantime, the share chugs on. In fact, FB’s market cap exceeded $ 1 trillion this week. If the market is a forward-looking mechanism, it doesn’t seem too much of a concern that regulators will ultimately prevail. Looking at the options market, out-of-the-money calls are valued higher than the corresponding puts in the Jan.21-22 series, suggesting that the market sees more upside potential. The 20-day moving average, which stands at 340, has led the current rally since March. The stock is currently 4% above this trend line, so we’re using this as the basis for our put credit spread.
If you’re okay with FB staying above its 20-day moving average, consider the following trade, which depends on the stock staying above 340 to expire in seven weeks. Note that FB reports earnings on July 28th.
Buy to Open FB 20Aug 335 Put (FB210820P335)
Sell to Open FB 20Aug 340 Put (FB210820P340) for $ 1.50 loan (sale of an industry)
That credit is $ 0.07 below the mean of the options spread when FB was trading just below $ 355. Unless the stock recovers quickly from here, you should be able to get close to that amount.
Your commission on this trade is only $ 1.30 per spread. Each spread would then bring in $ 148.70. This trade reduces your purchasing power by $ 500 and your net investment is $ 351.3 ($ 500 – $ 148.70). If FB closes above $ 340 on August 20, both options will expire worthless and your return on the spread will be 42% ($ 138.70 / $ 261.30).
This entry was posted on Monday, July 5th, 2021 at 8:13 pm and is filed under Stock Options Trading Idea of the Week.