Tuesday, July 3, 2012

FB: I've opened a position

I've been writing about Facebook Inc. (FB) since it started trading in mid-May. Today I opened a position.

My most recent posting on FB is here, and a more complete analysis is here.

FB announces earnings on July 26, and I wanted to have a bull position for that. My theory is that Facebook has been talked down so  much, there will be a tendency among traders and analysts to seize on the positive parts of the earnings.

Could be wrong, but that's my thinking.

Also, the company has every reason to make its books look good, and any company with a lot of money has the ability to do that.

Also, the chart shows the low price bouncing around the $31 level for four trading days, suggesting that this might be a new support area in the making.

But, being a cautious sort of trader, I didn't just put my chips on red and hope the wheel spun my way. I've opened a hedged position, a diagonal spread where I write contracts giving the other parties the right to buy FB from me at a certain price, and then insure that contract by buying call options on FB.

The premium I get from writing the contracts -- selling call options -- immediately reduces the basis on the call options I've bought, providing an immediate return of about 20%.

I've structured the position as follows:

I sold call options expiring in August with a $34 strike price, and I bought calls expiring in November with a $28 call. This gives me a 3:1 risk/reward ratio, which is quite good. And since the calls I bought don't expire until November, I'll have two more opportunities to sell call options against them, and then a third opportunity, if I wish, to use those calls as part of a vertical spread.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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