Facebook has taken a beating lately and I believe it might be a little overdone. Based on that belief, I sold a naked put on FB this afternoon. While FB was trading at $172.44, I sold one FB May $160 naked put for $4.25 and received $424.32 after paying $0.68 in commission. FB made it as high as $173.38 today before calming down some. I caught it on the way down and should’ve waited even longer since FB is down another $2.00+ since my limit order went through. The premium is up $0.45 since then, which I see as a decent change in less than an hour and a half, but irrelevant for my trade overall since the option has two months to go before expiration and will face a lot more volatility before I’m out of it.
FB hit an intraday high of $195.29 on February 1 and declined to an intraday low of $162 yesterday. This drop was slightly more than 17% and made the social media stock more attractive to me. I wanted to wait until it bounced from its low before jumping in and thought this morning’s rebound issued a good buy signal. Well, maybe not a buy, but a good entry point to sell a naked put out of the money. I didn’t want to go closer to the money, i.e. closer to the current price, because I’m this could simply be a dead cat bounce and FB could continue lower in the weeks ahead.
My cost per share will be $155.76 if the option is assigned. If FB hits my cost per share, it would be a full 20% retracement, which would mean FB is technically in a bear market. Generally, I think the idea of buying a company with cash flow like Facebook while 20% off its high is a smart decision. FB has a reasonable forward P/E ratio of 19.07 and has more room for growth with Instagram and other future purchases and/or home-grown business units.
If FB finishes May options expiration at or above $160.00, I’ll make a 2.72% return or 16.67% annualized. FB can fall another 9.67% before I take a loss. I’m comfortable with that risk/reward balance. For a few seconds, I considered selling the $165 strike, but liked the idea of keeping my cost per share lower if assigned and figured 16.67% annualized was enough reward if it works out. The $165 strike could’ve been close to a 21.5% annualized return with a 7.77% cushion.
I’m overextended by $9,140 if all my options were assigned, but I will probably close my NFLX naked put before long since I have more than $1,100 in profit available to realize and only $55 in time value remaining. Also, I’m holding onto my WMT shares still and was happy to see it up more than $1.50 this morning, although it rolled over some this afternoon.