Today I would like to share an article I sent to paying subscribers two months ago. It describes an 8-month options play on Facebook (FB), a company that seems to be doing quite well these days. The spread is a vertical credit put spread which I like because once you place it, you don’t have to make any closing trades (both options hopefully expire worthless, all automatically) as long as the stock is any higher than a pre-determined price. It is actually quite simple to do, so please don’t tune out because its name sounds so confusing.Terry
Here is the exact article sent out on April 24, 2015:
“A Long-Term Play on Facebook (FB): Last week in my charitable trust account I made a long-term bet that FB would not fall dramatically from here during the balance of 2015. It seems to be a good company that is figuring out how to monetize its traffic. I checked out the 5-year chart:
- Face Book Chart July 2015
While there were times when the stock made serious drops, if you check full-year time periods, there do not seem to be any that show a cumulative loss. Selling long-term
vertical put credit spreads allows you to tolerate short-term losses if your time period is long enough for a recovery to take place.
In my charitable trust account, I give away most of donations in December, so I like to have some positions expire in that month. Last week, with FB trading about $82, I was willing to bet that it would end up no lower than $75 on the third Friday in December. I sold Dec-15 75 puts and bought Dec-15 70 puts and collected $130 per spread. My risk (and the total possible loss) would be $370 per contract if the stock fell over $12 (15%) over those 9 months. If the 5-year chart is indicative of how things are going for FB, there should be no concern about a possible loss. If the company manages to end up over $75 at the December expiration, the spread would gain 35% on the investment. Where else can you make those kind of returns and still sleep comfortably?” (End of article.)
Fast forward two months until today and we see that FB has gained about $14 and is trading about $94. Now I am in a position where the stock can fall $19, a full 20%, and I will still gain 35% for the 8-month period. That works out to over 50% a year on my investment with an extremely high likelihood of making it.
I could buy back the spread today for $58 per contract (including commissions) and make 19% for the two months I have owned it, but I intend to wait it out until December and take the full 35%.
In one of our actual portfolios at Terry’s Tips, in January we made full-year similar trades to this FB trade using GOOG, AAPL, and SPY as underlyings, and the portfolio is on target to gain 91% for the year. It could be closed out today for a 63% gain for the first seven months (thanks to GOOG’s big up move after announcing earnings last week).
Vertical credit put spreads are just one way you can use options to maximize gains for a company you feel positive about, and the potential gains can be several times as great as the percentage gains in the underlying stock.