Here's One Way Investors Could Repair Their Broken Facebook (FB) Stock...

May 31, 2012 8:24 AM EDT Send to a Friend
Barron's Steven Sears penned a column late Wednesday pointing out a play on Facebook (Nasdaq: FB) which allows for investors to remain exposed while volatility hammers itself out: sell puts. Selling leaves risk open to investors betting for more adverse moves, but here's another good reason not to fear in the coming weeks: implied volatility.

Dealers are putting a higher volatility premium on Facebook because of the unknown value of the underlying business. With a higher implied volatility, selling puts now makes sense because option prices are likely to fall with the drop in volatility.

Sears suggests selling July 25 puts for $1.10 (or wherever the market value is at the time of execution). Implied volatility is currently at 65.6 percent and the bid-ask is $1.30-$1.40. At $1.35, traders will be obligated to buy Facebook (100 shares) if the stock is at or below $23.65 at expiration (not including any fees, commissions).

Of note, others appear to have taken the advice; open interest on the July 25 contract is now around 14,711, well above the 3,931 open interest at the 28 strike. Open interest doesn't indicate whether traders are long or short the option.

For those who already bought shares and/or might be taking a longer-term approach, sell December 27 puts. Implied volatility is just below 60 percent on those options. This gives Facebook six months to work itself out and move in one direction or another. The current premium is at about $4.50 (bid-ask of $4.40-$4.60), meaning traders will be able to keep a few hundred dollars if the stock was purchased at or below $38. In the meantime, if shares move higher, the investor will get $4.50 per contract in addition to the recovery of the stock.

Facebook shares are indicated for a higher open Thursday.


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