This Stock is Headed Higher

The 2018 stock market has been extremely volatile. It all started back on Feb. 2 with a hotter-than-expected U.S. jobs report that sparked fears of spiking interest rates. But since then we’ve had a slew of other headline risks like the likelihood of a global tariff war brewing.

But for Facebook, Inc. (NASDAQ:FB) stock, it became a little more complicated. Unfortunately for those who were long FB stock in March, it had the misfortune of suffering from what the media called a data breach crisis.

The event was not a data breach, since there wasn’t a hack.

A small company called Cambridge Analytica broke the Facebook rules and shared data with a third party.

FB cut ties with the offending company and ordered them to destroy the data.

What Facebook did wrong is that they failed to report the incident back when it happened years ago.

When the news broke out this year, the stock fell off a cliff as if the whole bullish thesis behind the potential of Facebook was dead and gone on the headline.

Luckily, I had the discipline to buy what others were selling and profited well from it. The headlines abated and the media eventually moved on to hotter issues, so the stock bounced sharply back to all time highs.

But for the last three days, FB gave back a little, which is normal in any uptrend. Prices usually break out and then revisit the neckline from which they sprang. Then onus falls on the bulls to prove that they can use the level as forward support for future highs. FB stock is in that phase now.

Today’s trade is bullish Facebook stock. However I am not one to risk $190 to buy the shares outright and leave myself without any room for error. Instead I use options once again to create profits without any of out-of-pocket expense.

In essence, I create a moat around my risk so I can sleep comfortably knowing that I do have a wide margin of error. Once Facebook establishes support around $185 per share, then I will add another trade to capture the upside potential.

I typically intend holding trades for months, but due to the extreme volatility this year, I’ve been actively trading around the price action more than usual. So I come into this trade with fast profits from a very short term trade.

The important thing is that I stick to fundamentals and my rules of engagement to minimize the odds of errors. For example here I am confident that Facebook at 28 price-to-earnings ratio is a good value. And for the purpose of this trade, FB would be an even better value if I got the shares at a 20% discount from here.

I’m convinced that should the worst happens in this trade setup, I will be able to manage out of my FB stock position for a profit in the long term.

FB Stock Trade Ideas
The Trade: Sell the FB Dec $150 put. This is a bullish trade for which I collect $3 to open. I have a 85% certitude that I will retain maximum gains, but if the price falls below my strike then I own shares. I would then need to manage off my break-even point of $147.

Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.

The Alternate Trade: Sell the FB Dec $150/$145 bull put spread, which has about the same odds of winning and would yield 15% on risk. Compare this with risking $188 per share here and without any room for error.

— Nicolas Chahine

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Source: Investor Place