All eyes are on Facebook after it’s record-setting slashing following disappointing earnings last week. Here’s the most eye-popping stat I’ve come across – FB lost $119 billion in market cap which marks the first time in history a stock has lost over $100 billion of its market cap in one day.

Suckitude doesn’t even begin to describe it.

What interests me today is fleshing out an idea for how a trader may go about playing the social media kingpin in the aftermath. The following tactics will be on display:

How a pro trades against the trend

Scaling-in

Exploiting high implied volatility

Fading extremes

High probability trade management

If these topics don’t excite you then move along. For everyone else that isn’t brain dead, proceed.

Let’s Get Technical, Technical

We begin with a technical take on FB’s stock chart. First, prices have plunged beneath all major moving averages suggesting the earnings plunge and subsequent follow-through has broken the back of the uptrend. That makes bearish trades seemingly easier than bullish trades for participants that insist on trading with the trend.

Second, with FB down another 4% in early morning trading today we’re seeing massively oversold levels being reached here. This means it’s incredibly hard to suggest a new bear trade if you’re not already in. The risk-reward simply isn’t all that attractive and shorting into the hole like this risks getting whacked on the inevitable snap-back that is brewing.

Third, two major support levels loom large – $160 and $150. The former marks a gap-fill zone from Facebook’s April earnings move. The latter is a major support zone that halted the stock’s last correction. If this oversold move persists into either area, I’d be willing to bet buyers finally emerge to defend their turf.

In summary, the next swing move in FB worth playing for those that didn’t already short Friday or earlier this morning is up not down. This constitutes a counter-trend play designed to fade the crowd.

Premiums are Pumped

On the implied volatility front, option premiums remain pumped even though earnings is in the rearview mirror. The typical post-earnings volatility crush has not transpired in Facebook for the simple fact that traders are viewing the release as a game changer. They don’t believe the stock will revert to its normal volatility. Instead, the evil genie that was let out of the bottle last week is expected to create big waves for a spell. The implied vol rank is standing firm at 56%.

I have a simple formula that illustrates this entire trade setup.

Really oversold stock + Major support looming close + High implied volatility rank = Scale-in to bull put spreads

Before I go into any further details, let me be clear that this is not a recommendation. The intent is merely to show how a high probability credit spread trader may look to capitalize on a situation like this. Facebook could get blown to smithereens over the next month.

Suppose we looked to sell September $150/$145 bull put spreads. You can think of the trade two ways. First, it’s a bet that FB will sit above $150 at September expiration. By the way, a move from its pre-earnings peak of $218.62 to $150 would be a 31% drawdown. Even with the terrible quarter, does FB deserve to be down 31% that fast? You’d think at some point the bad news gets priced-in, right?

Here’s a second way to think about the Sep $150/$145 put spread – it’s a way of getting a little bit of positive delta now, and potentially more later at lower prices. The net delta is 5 and will rise to as much as ten if we fall to $150. On a five-lot, that means you’d pick up 25 deltas now and around 50 if we continue pushing toward $150.

If you manage this by exiting quickly on a bounce, then, it’s not so much a bet that FB will be above $150 at Sep expiration (53 days away), as much as it is a way to pick up some bullish exposure so you can profit if the stock pops back.

Scaling In

You guess is as good as mine as to when FB snaps-back. Could be tomorrow, could be next week. All I know is each down day brings us closer to the inevitable rebound. You could wait for a reversal candle, or at least an intraday break of resistance, but even then there’s still the risk of being wrong.

To increase our chances, why not scale-in? If you’re willing to sell three contracts, maybe do one now, and leave yourself open to entering the other two at a better credit. Here’s an example of how it might work using the Sep $150/$145 bull put:

First Entry: Sell for 70 cents, Target 20 cents

Second Entry: Sell for $1.00, Target 50 cents

Third Entry: Sell for $1.50, Target $1.00

Obviously, you can modify this to do two or four tiers. Whatever. It’s the tactic that matters, not the exact numbers.

Financial freedom is a journey

The Tales of a Technician series is brought to you by Tackle Trading.

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.

# Sign up now for a 15-DAY FREE TRIAL #

Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses, and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involve a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax, and accounting advisors, to determine whether such trading or investment is appropriate for that user.