Profit From Facebook Price Volatility Using Options

Profit From Facebook Price Volatility Using Options


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!Profit From Facebook Price Volatility Using Options

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.

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