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This Is How the Pros Play the Facebook Lows

0 | By Shah Gilani

Facebook Inc. (NasdaqGS:FB) is a must-own tech darling stock. In five years, it went from $20 to $195, for an 875% gain.

But it’s been giving investors a royal headache lately, dropping from $195 to $150 in two months – a scary, quick 23% correction.

The social media hero, and sometimes villain, is now back up to just below $160.

If you own it, you’re probably wondering what to do with it. If you don’t own it and you want to buy it, you’re probably wondering what’s a good price to get into it. Or, if you’re a hater and want to see it keep falling, maybe you’re wondering how low it can go and how you can make money on it dropping.

Here’s how I see the company and the stock right now, and how to play it every which way.

FB’s Potential Is Staggering, But So Is Its Problem

Me, I want to buy into FB on this dip. That’s why I’m happy to see it scrape lower, so I can buy it cheaper.

The company is the social media $40 billion- (in revenue) and $16 billion- (in net profit) pound gorilla in almost everyone’s living room. It owns the social media space.

It also owns Instagram, WhatsApp, Oculus VR, and drone-maker Ascenta.

It has 2.2 billion users worldwide.

Think about that: 2.2 billion people are on and using Facebook one way or another.

That’s a huge target for advertisers. That’s a lot of customers to target for all kinds of sales, besides other sellers’ products, products, and services Facebook has yet to introduce.

Facebook’s potential is staggering.

But, so are its problems right now.

Call it growing pains. Call it the bane of technology, getting way out ahead of regulations that don’t exist for what new technologies bring with them. Call it what you want, just don’t expect these problems to go away – ever.

FB’s biggest problem right now, not that there aren’t others and won’t be lots more, is how a firm that got access to FB users and their friends may have targeted them with political messages, news, and ads to try to influence their voting in the past U.S. presidential election. The same data company, Cambridge Analytica, used FB users’ data in the U.K. to try to influence the Brexit vote and in Africa in other elections.

Mark Zuckerberg goes before Congress next week to answer questions about FB data protections, hacks, how it can be used to influence people, and probably a host of other hard-to-swallow questions.

The outcome of his testimony could shake Facebook to the core if he screws up. Even if he doesn’t, he could become the scapegoat for political infighting, which could result in all kinds of new regulations on how social media companies use all the data they collect.

If all goes well, then the stock’s probably heading higher again. But I can’t imagine Zuckerberg or Facebook is going to come out smelling like a rose.

So, here’s how to play the stock over the next few months.

The Perfect Way to Play

If you own FB and you’re worried it could go lower based on Zuck’s testimony, or if earnings disappoint on April 25, then you want to sell the stock and take you profits. Or, you can buy some put options for further downside protection.

A good technical analysis of FB shows it could easily drop to $120 if there’s a lot of selling on bad news.

If the stock drops down to $120, that would be a big move.

To protect yourself if you own the stock and don’t want to sell it, the simple way to make money on a downside move in the stock is to buy put options.

Since technically the stock could go to $120 on bad news, I like buying the $120 puts that expire on June 15, 2018, for about 90 cents. They’re relatively cheap right now, because not many investors think FB could drop another 25% from $160. But it’s possible. And given the market volatility lately mixed with FB’s own volatility, and if investors get nervous and FB breaks below $150 by the end of April or May, those puts should jump in value – possibly doubling or tripling if a big down move comes quickly.

Making put plays like this is what I recommend in my Zenith Trading Circle research service, and my readers have seen a LOT of really big winners making these kinds of moves.

Me, personally, I like FB for the long-term. I believe it will make it out of this mess, with new regulations trailing it for sure, but make it out nonetheless.

I believe the company has insane potential (when it gets its house in order and changes some business practices), and I have no doubt it could double in a few years.

But first, on a breakout above $160, especially if earnings numbers are as strong as they’re expected to be, the stock could pop a lot higher from here.

Zuck Muck and What to Do Next

There has, however, been some shorting of FB lately, especially going into the Zuck vs. Congress showdown next week. If nothing bad happens, the stock weathers the Zuck muck, and earnings are good, the stock will pop. And short-covering could make the upside move dramatic.

From here, around $160, if you’re betting the stock is going to rebound, the move to make is to buy call options.

Because the high on FB is $195 and it could get there again if all ends well, I like the $190 calls that expire on September 21, 2018 (FB180921C00190000). You can pick them up for around $3.00 if you’re patient.

I like buying the further out September calls, because that gives the stock a chance to bump up and down, even take a hit, because bad news always travels faster than good news – and there’s still a chance to recover after the summer doldrums.

Of course, in my Zenith Trading Circle research service, we can like FB on the downslide, and later as it climbs back to its former glory. In this situation, I like both the puts and the calls.

That way I can root for Facebook on the way down and later on the way up.

Sincerely,

Shah

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