http://www.Options-Trading-Education.com - Trading Facebook Options - In light of the upcoming Facebook IPO we add this discussion of trading Facebook options to our previous musings on GM options and trading puts on LinkedIn options.
According to press reports Facebook is soon to announce that it is going public with a $10 Billion offering in stock.
Speculation puts the anticipated value of the soon to be public company at $75 to $100 Billion. Many are saying this will be the hottest IPO since Google.
In the three and a half years after Google went public its stock climbed from $100 a share to $700 a share in the three and a half years that preceded the 2008 stock market crash.
Many expect the same rise in price for Facebook as private investors flock to the soon to be popular stock.
Because not all promising stocks keep going up and because such stock often become oversold and correct significantly, trading Facebook options may end up being more profitable that simply buying the stock.
Six days after the IPO opens rule will permit that Facebook becomes available for options trading.
Traders will have thoroughly analyzed fundamentals and will closely watch market sentiment.
If the expected excitement of private investors comes to pass, the stock will likely become overbought.
Traders seeing that situation coming will buy puts on Facebook.
Traders who expect to see the stock keep climbing will buy calls.
Hedging risk with options will also be useful for those who get in early and see a substantial stock rise.
Investors who believe that Facebook will replicate the Google experience will not want to sell their stock too early.
On the other hand they may choose to protect their gains.
They can do this by buying puts on Google while holding their stock.
If the stock continues to rise the investor will simply have paid insurance in the form of his put contracts.
However, if the stock falls in price he will be able to sell the stock at the options contract price and purchase again at the now lower price.
On the other hand he can also simply exit the options contract and use his profits to offset a loss of share price.
As volatility of the stock increases that could also increase the price of both puts and calls when trading Facebook options.
As we often remark, selling options tends to be more profitable over time than buying them.
However, selling options in a volatile market is the work of professionals backed by large institutions with deep pockets.
For small investors selling can be risky business.
One useful tactic for anyone interested in trading Facebook options could a long straddle.
The trader buys both calls and puts with the same expiration date.
He will win whether the stock goes up or if it goes down.
His cost of doing business is the price of the options contracts.
As always do your homework and stay out of trades that you do not understand.
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Trading Facebook Options
1.
2. IN LIGHT OF THE UPCOMING FACEBOOK
IPO WE ADD THIS DISCUSSION OF
TRADING FACEBOOK OPTIONS TO OUR
PREVIOUS MUSINGS ON GM OPTIONS AND
TRADING PUTS ON LINKEDIN OPTIONS.
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3. ACCORDING TO PRESS REPORTS
FACEBOOK IS SOON TO ANNOUNCE THAT IT
IS GOING PUBLIC WITH A $10 BILLION
OFFERING IN STOCK.
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4. SPECULATION PUTS THE ANTICIPATED
VALUE OF THE SOON TO BE PUBLIC
COMPANY AT $75 TO $100 BILLION. MANY
ARE SAYING THIS WILL BE THE HOTTEST
IPO SINCE GOOGLE.
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5. IN THE THREE AND A HALF YEARS AFTER
GOOGLE WENT PUBLIC ITS STOCK
CLIMBED FROM $100 A SHARE TO $700 A
SHARE IN THE THREE AND A HALF YEARS
THAT PRECEDED THE 2008 STOCK
MARKET CRASH.
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6. MANY EXPECT THE SAME RISE IN PRICE
FOR FACEBOOK AS PRIVATE INVESTORS
FLOCK TO THE SOON TO BE POPULAR
STOCK.
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7. BECAUSE NOT ALL PROMISING STOCKS
KEEP GOING UP AND BECAUSE SUCH
STOCK OFTEN BECOME OVERSOLD AND
CORRECT SIGNIFICANTLY, TRADING
FACEBOOK OPTIONS MAY END UP BEING
MORE PROFITABLE THAT SIMPLY BUYING
THE STOCK.
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8. SIX DAYS AFTER THE IPO OPENS RULE
WILL PERMIT THAT FACEBOOK BECOMES
AVAILABLE FOR OPTIONS TRADING.
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9. TRADERS WILL HAVE THOROUGHLY
ANALYZED FUNDAMENTALS AND WILL
CLOSELY WATCH MARKET SENTIMENT.
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10. IF THE EXPECTED EXCITEMENT OF PRIVATE
INVESTORS COMES TO PASS, THE STOCK
WILL LIKELY BECOME OVERBOUGHT.
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11. TRADERS SEEING THAT SITUATION COMING
WILL BUY PUTS ON FACEBOOK.
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12. TRADERS WHO EXPECT TO SEE THE STOCK
KEEP CLIMBING WILL BUY CALLS.
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13. HEDGING RISK WITH OPTIONS WILL ALSO
BE USEFUL FOR THOSE WHO GET IN EARLY
AND SEE A SUBSTANTIAL STOCK RISE.
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14. INVESTORS WHO BELIEVE THAT FACEBOOK
WILL REPLICATE THE GOOGLE EXPERIENCE
WILL NOT WANT TO SELL THEIR STOCK
TOO EARLY.
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15. ON THE OTHER HAND THEY MAY CHOOSE
TO PROTECT THEIR GAINS.
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16. THEY CAN DO THIS BY BUYING PUTS ON
GOOGLE WHILE HOLDING THEIR STOCK.
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17. IF THE STOCK CONTINUES TO RISE THE
INVESTOR WILL SIMPLY HAVE PAID
INSURANCE IN THE FORM OF HIS PUT
CONTRACTS.
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18. HOWEVER, IF THE STOCK FALLS IN PRICE
HE WILL BE ABLE TO SELL THE STOCK AT
THE OPTIONS CONTRACT PRICE AND
PURCHASE AGAIN AT THE NOW LOWER
PRICE.
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19. ON THE OTHER HAND HE CAN ALSO
SIMPLY EXIT THE OPTIONS CONTRACT AND
USE HIS PROFITS TO OFFSET A LOSS OF
SHARE PRICE.
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20. AS VOLATILITY OF THE STOCK INCREASES
THAT COULD ALSO INCREASE THE PRICE
OF BOTH PUTS AND CALLS WHEN TRADING
FACEBOOK OPTIONS.
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21. AS WE OFTEN REMARK, SELLING OPTIONS
TENDS TO BE MORE PROFITABLE OVER
TIME THAN BUYING THEM.
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22. HOWEVER, SELLING OPTIONS IN A
VOLATILE MARKET IS THE WORK OF
PROFESSIONALS BACKED BY LARGE
INSTITUTIONS WITH DEEP POCKETS.
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23. FOR SMALL INVESTORS SELLING CAN BE
RISKY BUSINESS.
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24. ONE USEFUL TACTIC FOR ANYONE
INTERESTED IN TRADING FACEBOOK
OPTIONS COULD A LONG STRADDLE.
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25. THE TRADER BUYS BOTH CALLS AND PUTS
WITH THE SAME EXPIRATION DATE.
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26. HE WILL WIN WHETHER THE STOCK GOES
UP OR IF IT GOES DOWN.
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27. HIS COST OF DOING BUSINESS IS THE
PRICE OF THE OPTIONS CONTRACTS.
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28. THE WORST HE WILL DO IS LOSE THE
PRICE OF THESE CONTRACTS IF THE STOCK
PRICE DOES NOT MOVE.
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29. AS ALWAYS DO YOUR HOMEWORK AND
STAY OUT OF TRADES THAT YOU DO NOT
THOROUGHLY UNDERSTAND.
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30. FOR MORE INSIGHTS AND USEFUL
INFORMATION REGARDING OPTIONS AND
OPTIONS TRADING, VISIT WWW.OPTIONS-
TRADING-EDUCATION.COM.
