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Updated Status: How to Buy Into Facebook
By
Wayne Ferbert Oct 19, 2012 2:00 pm
Options on trading Facebook heading into its earnings report.
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Back on September 21, my firm started a Facebook (NASDAQ:FB) investment. I said I’d be a buyer if it dipped down to the $20-$21 range. But I wanted to force myself to be a buyer and get paid to be a buyer. So I sold $20 October expiration puts.
Here I am at the October expiration and Facebook is trading at just below $19. My options will exercise at $20 and after the market closes I will own those shares of Facebook. I already collected $0.30 for each share of Facebook in the put. Therefore my effective price will be $19.70.
Since the day I put that trade on, Facebook has been a steady decliner, which is disappointing. I thought we would get a chance to sell OTM puts on Facebook for several months – reaping some premium that I could use to eventually buy into Facebook. It has only been a month and here I am, being forced to buy already.
If I still think that Facebook is a bargain at $20, then the $19.70 effective price should not worry me as long-term investors. However, Facebook will release its earnings next Tuesday after the markets close. Those earnings will give us some real insight into the progress that Facebook has made.
There are three options to choose from:
I am ruling out No. 3 since the premiums in the options for Facebook are very healthy, thanks to the uncertainty in earnings. These premiums give me some room to collect the premium and use it to offset the loss on the $20 put and effectively create a new lower entry point for me on the stock.
I like rolling to the $19 strike. It pays $1.50 and is only about $.15 in the money. If the stock moves up on earnings, then I won’t participate in full like I would if I owned the stock. But I will feel good that I got my trade back in to profitability.
If it trades down on earnings, then my new effective entry price will be around $18.40, which would be a full $1.30 lower than my original adjusted entry of $19.70.
This is it. If I am forced to own next month, then so be it. We’ll ride this growth story back up to a fair valuation.
Here I am at the October expiration and Facebook is trading at just below $19. My options will exercise at $20 and after the market closes I will own those shares of Facebook. I already collected $0.30 for each share of Facebook in the put. Therefore my effective price will be $19.70.
Since the day I put that trade on, Facebook has been a steady decliner, which is disappointing. I thought we would get a chance to sell OTM puts on Facebook for several months – reaping some premium that I could use to eventually buy into Facebook. It has only been a month and here I am, being forced to buy already.
If I still think that Facebook is a bargain at $20, then the $19.70 effective price should not worry me as long-term investors. However, Facebook will release its earnings next Tuesday after the markets close. Those earnings will give us some real insight into the progress that Facebook has made.
There are three options to choose from:
- Go ahead and get assigned and own the Facebook stock going into Tuesday's earnings;
- Roll the puts forward to November expiration at either the $20, $19, or $18 strike, depending on the premiums I like; or
- Close the short put at a loss and wait to see what happens during Tuesday’s earnings before setting up new position.
I am ruling out No. 3 since the premiums in the options for Facebook are very healthy, thanks to the uncertainty in earnings. These premiums give me some room to collect the premium and use it to offset the loss on the $20 put and effectively create a new lower entry point for me on the stock.
I like rolling to the $19 strike. It pays $1.50 and is only about $.15 in the money. If the stock moves up on earnings, then I won’t participate in full like I would if I owned the stock. But I will feel good that I got my trade back in to profitability.
If it trades down on earnings, then my new effective entry price will be around $18.40, which would be a full $1.30 lower than my original adjusted entry of $19.70.
This is it. If I am forced to own next month, then so be it. We’ll ride this growth story back up to a fair valuation.
No positions in stocks mentioned.
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