Facebook 3Q earnings

http://finance.yahoo.com/news/facebook-3q-results-show-mobile-225520333.html

http://finance.yahoo.com/q?d=t&s=FB

up 12% plus after hours!

A lot of people think the only way to play Facebook is through buying calls/puts or just plain stock.  However there are many ways to play Facebook where the odds and probability are in your favor.

Some key numbers first:

52 week range: $17.55-$45

To take advantage of high premiums, because of great uncertainty surrounding the Facebook stock, I sold -8 cash covered puts on FB in one of my Roth IRA accounts.

What is a Cash covered put? and Why $17?

Cash covered put definition:

http://www.optionsplaybook.com/option-strategies/cash-secured-put/

“The cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to be assigned and acquire the stock below today’s market price. But whether or not the put is assigned, all outcomes are presumably acceptable. The premium income will help the net results in any event.”

 Why $17?
 
Facebook’s all time low since its IPO in May has been $17.45.  When I make Cash covered put trades I am ok with either being assigned the stock OR having the options expire worthless.  However, I prefer the options to expire worthless.  Selling $17 puts the odds are in my favor that Facebook would not make a new low in 30 days and stay above $17.  I sold the options when the stock was @ $19.   Also, my $17 strike is over 10% below the price of the stock when I sold it.
 
Here is my ideal scenario:
 
-8 FB $17 puts for $.60 credit (means I get money/premium for tying up my cash and waiting)
 
Date/Time 
 
Description
 
Amount 
 
Net Cash Balance
 
 
 
  10/18/2012  12:37:03   Sold 8 FB Nov 17 2012 17.0 Put @ 0.6

 
  463.85   14,924.63  

So $463.85 credit after commissions ($60 * 8 – $16.15 commissions).

$463.85 / $13600 cash i need to secure these 8 puts incase they are assigned to me ($1700 * 8) = 3.41% return on your cash in one month!!!

 

This is a great strategy for all accounts especially IRA and retirement accounts where you cannot use Margin.  Since Facebook reported earnings that exceeded analyst expectations and the stock is up I can close the trade early or let it expire worthless in less than 4 weeks.  Hope this post was helpful in understanding cash secured puts, please post a reply or comment should you have any questions or comments regarding this strategy!

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3 responses to “Facebook 3Q earnings

  1. The options analysis regarding FB was GREAT! Well Done! Now, IMO, you should also explain the SPY spreads and WHY you chose them. This would REALLY help a lot of Income Seekers who want conservative trading approaches versus, buying straight calls and puts. Great job though, overall!

    • Thanks so much for your help! Absolutely will do! im trying to gather my thoughts and notes to present an article thats diff from all the cut and dry from the other spreads article.

      • Smart Man!
        Remember, most people who are wanting to trade are looking for something simple to generate safe, consistent profits. If you can explain your article in very simple terms that Joe Sixpack can follow and trade with, then you will score big! Let me know when you have it written up and I would sure like to link your article from my blog site.
        Happy trading and stay frosty

        mark alan

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