As you know, Facebook (FB) is currently facing some woes because of the Cambridge Analytica saga where user data were mined for campaign purposes.
As a result, the Facebook stock price was hammered from a high of about $185 to a low of about $163 these few days, a drop of 12% which is correction territory. And the volatility continues to be high, intraday can swing between $163 to $173, it ended $169.60 last night after hours.
Those of you with fundamental analysis and value investing background may find that FB is fairly valued or undervalued at $163. Let’s assume that’s the case. You can of course buy the shares outright at $163 a share, or $1,630 for 10 shares and $16,300 for 100 shares.
For comparison to options which are denominated at 100 share per contract, we take the example of buying the shares outright at $16,300.
You can actually buy a Call option on FB instead (which gives you the right to exercise the option and own the shares) by paying a fraction of the stock price.
I bought a leap call option Strike Price 130 expiring Jan 2020 at $5,200 last night. Do not worry if the language is new to you. The key message is instead of paying $16,300, I only pay $5,200 (or 32% of the stock price) and the effect is almost equal to owning the shares. My risks are however reduced. If FB goes to zero, I lose $5,200 at the maximum instead of $16,300.
Leveraging on the price volatility of FB, I entered this trade as I feel at $163, it is really oversold. I have two other trades on FB (won’t go into details but they involve selling puts on FB) and so that I don’t take too much exposure on this single counter, I closed my buy call at $5,330, giving me an ROI of 2.5% within 30 minutes!
Options on stocks can be a very powerful tool that you can use alongside value investing principles (read My Investment And Trading Journey). I know sometimes there is misconception that options are risky but indeed if you apply it correctly, it is a hedging instrument instead.
I do recommend that you consider learning about options (for US market etc but not Singapore market). There is a forthcoming workshop next Tuesday (27th March) where you can get an introduction to Options that you can sign up.
Cheers, and I wish you continual successes in your investment journey.
Disclaimer: I am not licensed to give investment advice, this article is purely for education purpose, please do your own due diligence and make your own investment decisions as it concerns our hard-earned money.