The recent IPO of Facebook has been fraught with all sorts of problems, the least of which is a significant decline from its $38 per share IPO price. As of yesterday, Facebook (FB) closed at $28.19. I won’t be getting into the investigations and shareholder lawsuits, but I will explain how it is now possible to invest in Facebook stock without fear. The reason for this is that options on Facebook starting trading earlier in the week.
Has Facebook Found The Bottom?
That’s a question to which many investors would love to know the answer. If the stock has bottomed, then it is time to invest. But no one really knows the answer to the question. So is there a way to make some money on Facebook stock without knowing the direction? Yes, there is. Let me explain how I would do it and why.
First, the stock could easily go down to $25 or $20. I would want to make sure that I was protected against this possibility, so I would go into the market this morning and buy put options for the number of shares that I would eventually want to own. Let’s say that I ultimately wanted 1000 shares of Facebook. I would then purchase 10 put contracts.
I would probably go for the July 21st expiration and the $28 strike. I could purchase them for $2.50 per share based upon the likely open this morning. I would then buy 500 shares of Facebook and try to get a price of $28.50 per share. So my total cost per share at this point is $33.50 because I spent $2.50 per share doubled on the options.
Then I would wait.
Stock Goes Down: If the stock continues to decline over the next few weeks, I would try to pick up the additional 500 shares for $25 or less. Those shares would then automatically be sold at $28 in July. Or I could simply sell the extra put options for a profit to offset the decline in the shares that I own.
Stock Goes Up: If the stock seems to have bottomed, then I would look at selling some call options to offset the initial cost of the puts. Then I would start looking to purchase the additional 500 shares that I had originally wanted, knowing that I still had the protection of the puts below $28.
Stock Goes Nowhere: This is unlikely since there is a lot of movement in the stock. But if that ends up being the case, within the next 5 days or so, I would want to sell some calls to offset the cost of the put options and see what happens after that.
This may be a little difficult to follow if you haven’t worked with options before, but I will follow the trade and update in several weeks. It will probably be a little easier to understand at that time.