from the desk of Dr. Terry F Allen

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Facebook (FB) Wins in Court and on the Charts

Facebook (FB) scored a big win in court this week when a federal judge threw out two complaints – one from the FTC and one from several state attorneys general – that it violated antitrust laws. Antitrust clouds have been looming over FB and its mega-giant tech brethren for some time, yet these stocks keep on ticking. FB reacted to the news by hitting an all-time high. But the stock was in rally mode well before the court win, gaining 40% in the past four months. Love it or hate it, FB has a deep roster of legal and lobbying talent that will draw out the regulatory process, if not water it down in the end … whenever that might be.

In the meantime, the stock keeps on chugging. In fact, FB’s market cap crossed the $1 trillion mark this week. If the market is a forward-looking mechanism, then it doesn’t appear too worried that regulators will ultimately prevail. Looking at the options market, out-of-the-money calls are priced higher than the corresponding puts in the 21 Jan 22 series, suggesting that the market sees more upside. The 20-day moving average, which is at 340, has guided the current rally since March. The stock is currently 4% above this trendline, so we’ll use this as the basis for our put credit spread.

If you agree that FB will stay above its 20-day moving average, consider the following trade that relies on the stock remaining above 340 through expiration in seven weeks. Note that FB reports earnings on July 28.

Buy to Open FB 20Aug 335 put (FB210820P335)
Sell to Open FB 20Aug 340 put (FB210820P340) for a credit of $1.50 (selling a vertical)

This credit is $0.07 less than the mid-point of the option spread when FB was trading just below $355. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $148.70. This trade reduces your buying power by $500 and makes your net investment $351.3 ($500 – $148.70).  If FB closes above $340 on August 20, both options will expire worthless and your return on the spread would be 42% ($138.70 / $261.30).

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