The Contrary Investing Report
Investing and Trading News, with a Contrarian, Sarcastic Twist!


Trading Facebook’s Trading Range for Steady Income

by Brett on December 20, 2012

Facebook has quietly carved out – and bounced up from – solid support in the high teens.  Signs that monetizing mobile may not be as hopeless as previously thought have helped buoy a FB rally of 50% since September.

So should we buy or sell FB here?

The correct answer may be both – as in “buy…and sell covered calls on our shares.”

I bought FB at $27.00 on November 29th, anticipating a continued move higher.  I was late on pulling the trigger – the time to buy was a few days (and dollars) earlier, when the CMF turned positive in tandem with the 10-day moving average (blue line below) pulling away from the 20-day EMA (red line).

selling covered calls on facebook

My late trigger pull notwithstanding, there was – and still is – a great way to make money on FB.  And that’s by selling covered calls.

When the FB rally stalled, I sold the December $29 calls on 12/11 for a premium of $0.50 per share.  These calls are highly likely to expire worthless.  So I was able to pocket $0.50 per share – nearly a 2% return on the initial position – in just 10 days.  Our initial cost basis is down to $26.50.  Money for nothing…and your call spreads for free.

The fun can continue next month – the January $29 calls are currently selling for $0.80, which would equate to about a 3% return in a month, and allow for additional appreciation of up to $1.64 per share.  If you didn’t care about the appreciation, you could sell the January $28 calls for $1.20.

I believe the key factor that allows for these big spreads – and hence opportunities – is the volatility…or at least the perceived volatility…in technology stocks.  My IRA consists of Guidewire (GWRE), Intel (INTC), Microsoft (MSFT), and Facebook (FB) at the moment – because:

  • They have fat option premiums, and
  • I believe the downside of each business is limited

It’s been far tougher to find nice option premiums outside of tech.  For now, that seems to be OK.  As long as internet and mobile users continue to hit the Like button, we’ll continue to hit the Bid button on FB’s $29 calls.

Chart courtesy of StockCharts.com – click on it to enlarge.


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