The FB Options Strategy for Friday: Will it Work?
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The FB Options Strategy for Friday: Will it Work?

John F. Carter - February 12, 2016

Hi everybody, this is John, and welcome to the free video. This market continues to be very volatile. One thing I like to the long side, even if a shorter term basis, is Facebook (FB). Why is that? First of all, it's one of the few weekly charts that's maintaining its bullish posture. You've got the 8, on top of the 21, on top of the 34, on top of the 55, and on top of the 89 period moving average, and price is above the 21. That, by definition, is a strong uptrend, even with all this craziness going on.

I also like that there's the beginning of a new squeeze here. And we've got momentum coming higher. And today, the NASDAQ futures retested the lows while FB held strong, which is a bullish divergence So I'm looking for FB here simply to move to the top of this current channel, which would take it to about $105. Okay?

So. How do you structure this trade? I like to do a combination on something like this. When we're getting into a signal like that early, I like to start off with a directional position that's a little bigger than normal. But then offset that with a put credit spread that helps offset the premium decay. Because if you just buy an option, every day you're losing a little bit of premium. Now, hopefully the stock rises enough to offset that premium. But if it doesn't, you're just losing money every day. To offset that, you can sell a put credit spread, and then the premium you make here can offset--or partially offset--the premium you're losing here. In a perfect world, what happens is--in this case, with FB, we rally up to $105, and in this case, we take profits here. That's the directional trade, and the faster, the better.

Because, remember, even if it goes to $105, if we hold onto those calls and it trades sideways for 4 or 5 days, we're going to be losing money on premium decay! The key with this is, find what I call the slam-dunk, lay up level, and if you get up there, especially quickly, just get out. Then we can continue holding the put credit spread. So that's how we're playing that one.

Another example of this, very similar to FB, is Gilead (GILD). On this particular stock, we actually got into a trade back in here, We bought calls with the idea that we'd just come up and fill the gap. And then we sold puts. When we filled the gap, we sold the calls, and made a couple of points on those. Then we're continuing to hold this put credit spread.

So we sold this for $1.57, and right now we can buy it back for $0.29. That means we keep the difference. If you bought an option for $1.57 and suddenly it was worth $0.29, you'd be down money. If you bought 50 contracts, you'd be down $6,375. But if you sell it--as a spread, to limit our risk--then that money flows into your pocket.

So now we've got to decide, if tomorrow--Friday--if GILD closes above $86, then we actually get to keep this money too, which is an extra $1,500. However, we don't want to take a ton of risk. If GILD falls well below $86, we start losing money on the trade. So, we'll keep a close eye on that. But the same strategy we did with GILD, we're doing with FB. We only held those calls for, like, 2 days. Then we bailed.

Last but not least, LinkedIn (LNKD). It got hammered on earnings, and now it's kind of trading sideways. It was up a little today, but I don't think this one will rally very far. So on this one, instead of selling a put credit spread--a put credit spread is for when you don't expect a stock to go down more. Ideally, it rallies, gives you some cushion. In this case, we sold the 104 - 110 call credit spread for $2.23. We had some good profits on it yesterday, but today it rallied a little bit, so it's a scratch trade. Open PnL of $180.

But the bet here? By the end of next week, LNKD is below $104. This is our stop loss. Now, if the market gets crazy to the upside, I'll probably cut this one loose. But I like to have some call credit spreads in this market, too, since it's been volatile. It's been in a downtrend, and we want some exposure to that, if the downtrend should continue.

New to options? Henry Gambell and I are doing a class this Saturday. The link is below!