It might not be a bad idea to have a bullish options strategy on Facebook Inc (NASDAQ:FB) given the stock’s performance over the last two years, Stacey Gilbert suggests in a segment of Breakout Session on CNBC.
In the discussion, the expert from Susquehanna International Group first showed a graph courtesy of FactSet of Facebook Inc (NASDAQ:FB)’s closing price over the past year. Yesterday, the stock closed at $78.43 per share. The graph also included the average Wall Street price target for the stock which is currently at $95.88, Gilbert notes.
She adds that since she doesn’t cover Facebook Inc (NASDAQ:FB) fundamentally, she is going to rely on the Street to give her a sense of what the sentiment is. In terms of how the ratings are going, 88% of analysts have a positive rating and there has actually been a decline in terms of negative ratings as there are now only 12% remaining with a Hold rating as the rest have Buy ratings.
According to Gilbert, the difference between the average price target of $95.88 and the closing price today at $78.43 is around 18%. This, believe it or not, she says, is one of the biggest discounts that the company’s stock has seen over the past year in terms of where the firm’s shares have closed versus that average price target.
When the price of the world’s largest social network is compared to the S&P 500, the firm is one of the few companies that are “trading at such a discount to its price target,” Gilbert says.
She then presents Facebook returns over the past two years and it has a “monster” return, she notes, as the stock is up almost 200%. She says that because of the massive rally, she is more interested in using options to limit downside risk while still giving having upside exposure.
However, when buying options, investors may want to know where implied volatility is, she cautions. Nonetheless, Facebook’s implied volatility is declining and it is currently at 5th percentile over two years, she says.
To get embedded protection by limiting downside risk through options, she suggests that an investor can opt to buy options that are trading historically at one of the lowest levels that has been observed over the last two years.
“Specifically, I’m looking at the July 17, 2015 expiration. I’m looking at the Facebook 80-strike call offered today at $2.66. My breakeven here is $82.66 – the strike price of $80 per call and what I’m paying for every call which is $2.66. If I’m correct and Facebook rallies here, I have unlimited upside potential because I own the call outright and as shares rally, I’m going to win dollar for dollar on the upside,” she says.
She adds that on the downside, she can be out completely of her initial cash outlay of $2.66. However, if Facebook Inc (NASDAQ:FB) shares decline significantly, that’s the maximum she can be out so she has limited her downside while giving herself upside exposure at a volatility that is near two-year lows.
Philippe Laffont’s Coatue Management owned about 7.18 million shares of Facebook Inc (NASDAQ:FB) by the end of the last quarter of 2014.
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