Can you imagine how profitable Facebook is?
Do you know FB is severely undervalued right now?
SlashTraders will show you how to maximise investment returns with options when FB is undervalued.
Why Invest In Facebook Stocks?
Facebook's advertising revenue has been on a steady increase since 2009, and it reached nearly $84.2 billion in 2020. Facebook is a money-making machine.
What Is the Fair Value of Facebook Stock?
Facebook's fair value is 23% higher than the current market value of $260.
Take a closer look at Trefis' analysis of FB, we can see 94.3% of Facebook's value is from ad revenue. Given the Gross Margin of advertising is 86.7%, we can see Facebook is tremendously profitable.
How to Use Options to Leverage a High Return on FB
While Facebook's stock price has been heavily undervalued by 23%, it is still a very profitable company with more than 86% Gross Margin. We believe FB's stock price will continue to go up and up in the future.
Facebook stock price has recently dropped to close to 200-day Moving Average. From last year's price trends, FB stock always rebounded before crossing the 200-day MA, so there is a high probability FB will go up again.
If we buy Facebook stocks to anticipate the price to rise, we and expect 23% return according to Trefis.
A good way to increase leverage is to trade options instead. We can buy a Call option close to the current market price, and receive a huge profit when the stock price go past the strike price.
Since FB is $260 right now, we can buy a Call at $265, and sell a 255/260 Put Spread to reduce the cost of the long Call.
This trade would cost us $560.
Trading Facebook Options in TD Ameritrade
In the Trade tab, we browse to the FB options that expire next month.
- Left-click at $265 Call
- Then left-click + Ctrl to select $260 and $255 Puts
- Change Qty to 1
- Change $260 Put to SELL, the other 2 options to BUY
Then we can right-click Analyse this trade.
We can tell from the analysis that:
- Cost of the trade is $568
- Maximum loss is $1068
- The trade's breakeven price is $270
- If FB rises to the fair value of $320, the value of our options will rise to $4900, which is 770% Return on Capital
If we compare the differences between trading stocks and options, when the undervalued Facebook stock rises to $320, there is potential for only 23% profit.
|Trade Method||Stocks||Sell Put Spread + Buy Call|
|Market direction||Rise to $320||Rise to $320|
|Cost of trade||$261||$568|
Even though the minimum cost of trading options is double the stocks, but we can achieve 770% return when the stock rises to $320.
Now is your turn to try the strategy we discussed today. Please leave a message below if you want me to analyse other popular stocks.