A recent favorite among Robinhood traders, Facebook $FB is consolidating near all time highs and put in a clearly defined risk management level last week that gives us a great level to lean against on the long side:
On both absolute price action terms as well as relative strength terms, $FB is showing all the signs of a stock that wants to move higher.
Here’s Steve Strazza with some more color on the opportunity that was uncovered during his recent “Under The Hood” piece published last week:
Multi-year base breakouts like these are great because our risk is well-defined and we usually get a nice move higher following the pattern’s resolution. We want to own FB if price is above its former highs near 219 with a 1-3 month price target at 279.
With earnings on the horizon in a couple weeks, premiums are starting to get a bit juiced in the options, but not too bad. Regardless, I’d like to limit my cost of participation a bit (and minimize my risk) by utilizing a spread to get bullish.
Here’s the Play:
I’m buying a $FB November 240/280 Bull Call Spread for approximately $13.75. This means I’ll be long the 240 calls and short an equal amount of 280 calls for a net debit — which represents the most I can lose in this trade.
If $FB shares close below $209.50 at any time during my hold, then I’ll attempt to close the trade to limit my losses. If that level is broken, then I’m too early on this bullish bet.
On the upside, if the $FB breakout materializes, I’ll look to close the spread for around $27.00. This would represent capturing approximately 50% of the maximum available profit in this spread (most it could be worth is $40) as well as a doubling of the risk I took. I like that. I have no desire to hold this spread all the way into November, if I can help it.
If you have any questions on this trade, please send them here.