Different Ways to Like Facebook

 | Apr 30, 2014 | 12:31 PM EDT  | Comments
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Stock quotes in this article:

FB

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amzn

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goog

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twtr

On this quarter's earnings report, Facebook (FB) didn't distance itself from names such as Amazon (AMZN) or Google (GOOG, GOOGL) or Twitter (TWTR). Facebook simply solidified itself in its own terms as a strong company continuing to surprise and impress even the most bearish of viewers. Still, it can be tough to make a commitment to buy a stock even after the strongest of reports in the current environment. As we've mentioned already, many times, momentum names have struggled. 

The charts on Facebook aren't showing quite as many cracks as many other charts out there. The daily chart reflects a bit of a disappointment since earnings but it still shows that the stock is trading in a channel between $56 and $64. The key sticking point right now is just below $60 where the eight-day and 21-day simple moving average (SMA) are coming together. Ideally, bulls do not want to see the eight-day SMA back beneath the 21-day SMA. The stock's momentum has waned, although it is not completely dead yet.

Facebook (FB) -- Daily
Source: StockCharts.com

Expanding out to the weekly chart, the key point to focus on is Facebook's ability to remain above its 40-week SMA. Furthermore, the 20-week SMA is still above the 40-week SMA. RSI continues to hang above 50 and should do so as long as the price holds above the 40-week SMA. Ideally, we'll see the price quickly recapture the 20-week SMA. But, in thinking back to that daily chart, remember the other shorter-term moving averages around $60, which will act as resistance.

Facebook (FB) -- Weekly
Source: StockCharts.com

So, what to do? For those who don't mind risking some premium, then a July $55-$65-$70 skip-strike butterfly on the call side for $2.50 or less might be an attractive play. This offers a maximum value of $10.00 if the stock closes at $65 by the July expiration. It would be worth at least $5 if FB is above $65. Furthermore, the trade starts with an intrinsic value near $3.50 ($58.44-$55), which is always a plus.

For those not wanting to outlay much in the way of premium, and are cautious on the near term and looking to buy the stock lower, selling puts could work or even ratio put spreads. For instance, if you are comfortable buying at $47.50, but think there could be near-term downside, why not try to catch some of it? A trader could go long 2x June $55 puts and fund the purchase by selling 3x June $52.5 puts. This might cost about $0.25, but if FB retraces to $55, a big support area, then the potential value here is $5.00. The stock would have to break well below $47 for this to become a painful trade.

Another approach would be to go further out in time but get closer to the current price. For instance, a trader could go long 1x July $57.5 puts and short 2x July $52.5 puts for around a dime. The break-even level is also $47.50. The maximum upside is still the same $5.00 value at a slightly lower target of $52.50 at the July expiration. 

Either of the last two positions offers the potential to either own Facebook at a lower price without a big cash outlay or even make money if the stock retraces a bit, but holds major support levels. The skip-strike butterfly offers a "discounted" buy in exchange for a limited upside. Still, a small 2.5% gain between now and June expiration would offer a doubling in value. Given that it is Facebook, this fly should still have some value in mid-May, even if the stock is in the low $50s. These are just a few different ideas to approach a name I feel is strong in a questionable environment.

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