Facebook options? Already?
It only took the social media giant seven trading days to qualify for listed options. Typically, it takes a newly issued IPO several months to qualify, but as we all know Facebook is a different beast.
Just like the stock, Facebook (FB) options debuted with record-setting volume. Individual investors and professionals alike piled into Facebook options with 312,000 contracts traded throughout the day. Only Apple (AAPL) experienced more activity.
And what does all of the historic activity mean to investors? It means we can add Facebook to our short list of highly liquid options offered. As I have stated numerous times in the past there are only about 100 stocks (35-50 ETFs) that offer truly liquid markets. And the more liquid the option the tighter the bid/ask spread. This is extremely important because the bid/ask spread impacts the cost of using options. Wide bid/ask spreads eat into the potential profitability of your investment, and contribute to what is known as 'slippage'.
So, now that we know the Facebook options market is liquid we can let the trading/investing begin.
As most of us already know, Facebook has been met with sellers since day one. All of the horrible press and PR have led to arguably one of the most disappointing IPOs on record. Shareholders are in disbelief.
Yet, the recent sharp decline offers investors an opportunity that most are not aware exists.
Let me explain.
Increased fear in a stock typically leads to a spike in implied volatility (IV). Currently the IV in July Facebook options is 62.8%, well above VXN which is the benchmark for Nasdaq stocks.
The increase in implied volatility offers wonderful opportunities for those of us who prefer selling options rather than buying.
And the strategy best suited for inflated options premium – credit spreads.
With Facebook currently trading at $28.30 and implied volatility at 62% you could sell a July 2012 23/21 vertical put spread for roughly $0.30 for a return of 18% over the next 51 days (July options expiration).
This is exactly the strategy (among others) that I use in the Options Advantage portfolio….because I can make 18% over 51 days with a probability of success of over 75% on the trade/investment. Facebook stock would have to fall an additional 20% or below the break-even price of $22.70 in order for the trade to start losing money and below $21 to hit a max loss. The chance of that happening – 17%.
Editor and Chief Options Strategist