Updating our FaceBook strategy

by Wayne Ferbert on October 19th, 2012

Back on September 21st, we started a FaceBook (FB) investment. Here is the article. We said we’d be a buyer if it dipped down to the $20-$21 range. But we wanted to force ourselves to be buyers and get paid to be buyers. So, we sold $20 October expiration puts.
 
Here we are at the October expiration and FaceBook is trading at just below $19. We will get exercised in to owning FaceBook at $20 after market close today. We collected $0.30 for each share of FaceBook in the put. So, our effective price will be $19.70.
 
Since the day we put that trade on, FaceBook has been a steady decliner. I am disappointed mostly. I thought I would get a chance to sell OTM puts on FaceBook for several months – reaping some premium that I could use to eventually buy in to FaceBook. It has only been a month and here we are being forced to buy already.
 
If we still think that FaceBook is a bargain at $20, then the $19.70 effective price should not worry us as long-term investors. However, FaceBook has earnings on this Tuesday after the markets close. Those earnings will give us some real insight in to the progress that FaceBook has made.
 
I have three options to decide from:
1.     Go ahead and get assigned and own the FaceBook stock going in to Tuesday earnings
2.     Roll the puts forward to November expiration – at either the $20, $19, or $18 strike depending on the premiums I like
3.     Close the short put at a loss and wait to see what happens on Tuesday’s earnings before setting up new position
 
If I had a strong feeling on the FB earnings, I would let that feeling guide the decision. But I do not have a strong feeling on the earnings. My gut tells me that they will report good numbers and show some traction with their important new product pushes. However, we know they are very capable of disappointing also.
 
I am ruling out #3 – as the premium in the options for FB are very healthy - thanks to the uncertainty in earnings. These premiums give me some room to collect the premium and use it to offset the loss on the $20 put and effectively create a new lower entry point for me on the stock.
 
I like rolling to the $19 strike. It pays $1.50 and is only about 15 cents in the money. If the stock moves up on earnings, then I won’t participate in full like I would if I owned the stock. But I will feel good that I got my trade back in to profitability.
 
If it trades down on earnings, then my new effective entry price will be around $18.40 – a full $1.30 lower than my original adjusted entry of $19.70.
 
This is it. If I am forced to own next month – then so be it. We’ll ride this growth story back up to a fair valuation.



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