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Tales of a Technician: Trading the Facebook Flop

July 30, 2018

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Tales of a Technician: Trading the Facebook Flop

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


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.

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3 Replies to “Tales of a Technician: Trading the Facebook Flop”

  1. Avatar FRANCOCORIA says:

    I think every option trader in the planet is looking and how to play FB now. Love the ideas.
    Ty, what do you have in mind in terms of timing? are you waiting for a signal, or will you just place the trade tomorrow?

    1. Tyler Craig Tyler Craig says:

      Yo Franco.

      You have three choices on triggering in. First, deploy into weakness. Basically when FB gets so oversold (like yesterday) that you can’t help but dip your toe in the water then pull the trigger. Second, wait for a break above intraday resistance. I use a 5-minute chart and look at the pivots. This also triggered yesterday. Third, wait for a break above the prior day’s high. This hasn’t happened yet.

      I ended up entering yesterday using the first technique. Sold the Sep $150/$145 bull put for 65 cents. I will cover at 30 cents if I can get it in the next few days.

  2. Avatar FRANCOCORIA says:

    Hey T…I got late to the first FB reversal party, but I like this week’s set up as it came back down to $170ish. I’m thinking a bull put around 160/150 or so, with a stop-loss if it breaks below $170.


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