From CNBC's Options Action - A Cost Free Trade on FB
From tonight's show(3/8/13) on CNBC's Options Action, the contributors reviewed a bullish position on Facebook(NASDAQ: FB). Facebook has been a Social Media stock performance laggard behind Angie's List(NASDAQ: ANGI), LinkedIn(NASDAQ: LNKD), and Yelp!(NYSE: YELP) respectively.
Technical Analyst Carter Braxton showed that Facebook is in classic, well defined Head and Shoulders Bottom Pattern, and he expects it to make a run to the "neckline" at $32, which is a 20% move. Options Action contributor, Mike Khouw is cautiously bullish on Facebook, and does not want to buy at today's price of $27.86. So, he structured a trade that is Cost-Free(but not risk-free), where if it breaks to the upside, the position will make money, and if it breaks down, then you can buy the shares(getting assigned the stock from selling a put) at the lower price.
The Advanced Option Strategy is called the Call Spread Risk Reversal, which has 3 legs using both Calls and Puts. Here is the structure:
1. Buy an April 29 Call and simultaneously Sell an April 32 Call costing a Debit of .$90(Bull Call Spread).
2. Sell 1 April 25 Put for a Credit of $.90.
Cost of the Trade = $0 (initially)
The April 25 Put will finance the cost of the April Bull Call Spread, making it a Cost-Free trade. The implied volatility is elevated in the stock, making it ideal for selling both the Call and the Put. The Stock is range bound and could break out. Any bullish news could send it higher. I am bullish on Facebook
, so I like the trade getting the shares "On Sale" if the stock retreats, but has profits to the upside if it decides to make a run.