Buy Facebook at a 10% Discount… or Get Paid Not To
Even though Facebook’s (NASDAQ: FB) first quarterly earnings as a publically traded company were in line with analysts’ expectations, the stock plummeted to all-time lows following the report. Facebook’s nearly straight down move since the much-anticipated initial public offer (IPO) has been the talk of the markets for the past few months.
After an IPO price of $38 for the fortunate few that got shares from the underwriters, Facebook peaked at $45 the first day of trading. But those investors aren’t feeling so lucky now, as the stock is down almost 40% from the IPO price and close to 50% from its high.#-ad_banner-#
Last month, I recommended a cash-secured put sale strategy that paid traders to NOT buy the shares as the options sold expired worthless. This month, you have another chance to use this strategy to buy the stock at a 10% discount… or get paid not to, in which case, the premiums we take in each month lower the stock cost if/when the shares are eventually assigned to us.
Cash-Secured Put Sale Strategy
While the typical investor may use a straightforward limit order to buy a stock at a designated price or lower, the options trader can do one better by selling a cash-secured put.
This strategy has the same mathematical risk profile as a covered call. With the put sale, there is an obligation to buy the stock at the strike price if it is assigned, allowing you to get into the stock at a discount.
Investors Will Like Facebook Eventually
It is highly unlikely that Facebook will continue to fall for the long term. At some point, the company’s fundamentals will override Wall Street‘s disappointment.
As of this writing, FB was trading around $23 after recently making new lows. The halfway point between the stock’s all-time high and the worst-case scenario of zero is $22.50. That price floor is likely to hold, making it a good buying point.
Recommended Trade Setup: Sell to open FB Aug 22 Puts at $1 or better.
With August options expiration just three short weeks away, time decay is working in put sellers’ favor. If the stock falls below $22 by expiration, the owner of the put would exercise and you’d likely be assigned long shares at $21 ($22 strike minus $1 premium), which is about 10% lower than FB’s current price, and would cost you $2,100.
If you don’t get assigned the stock, you can simply pocket the premium and move on to the next opportunity. But if you do end up owning FB, you may want to consider selling a September covered call against the stock to lower your cost basis even further.
There are two rules that cash-secured put sellers should follow in order to be successful:
Rule One: Only sell puts on stocks you want to own.
The intention of this strategy is to be assigned the stock as a long-term investment (each option contract represents 100 shares). So make sure you have the funds in your account to buy the stock.
Rule Two: Sell either of the front two option expiration months to take advantage of time decay.
Collect premium every month on put sales until you are assigned shares at a cost-reduced basis. Every month that you keep the premium is money subtracted from your entry price.