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FaceBook: 1 Year Later

Today marks the one year anniversary of FaceBook’s IPO. After a year of trading the stock is down 37%, and today one option trader is betting that the stock could trade even lower. One of the biggest FB trades today was the purchase of 8353 July 25 puts and the sale of an equal number of July 22 puts. This creates a vertical spread for a net debit of $0.55. This will profit if FB is below 21.45 at July expiration, 19% lower.

This trade could be a either a trader speculating that FB will move lower, or a long term investor that wants a cost effective hedge against a dip in the shares. The benefit of put verticals like these is the risk/reward ratio that they offer: this trade risk only $0.55 but has the potential to return up to $2.45 in profits, for a 445% return on investment. Therefore it allows FaceBook bears to gain exposure to the stocks downside without taking too much risk if they are wrong. Similarly, for someone who is long FB shares it offers the ability to hedge their losses between 25 and 22 without outlaying a lot of cash in option premium.

Despite FaceBook’s sub-par stock performance over the last year, the stock has rebounded well off of its 52-week low and has made progress in proving that they can monetize the shift to mobile. Over the last year mobile advertising has gone from non-existent to 30% of advertising revenue. But to get back to its IPO price, FaceBook will have to continue showing strong growth in mobile revenue as well as users. Recently the stock has made a series of higher lows, and revenues are growing. Therefore I would rather be long than short here, but think that owning cheap insurance in terms of this put spread is not a bad idea for someone who wants to smooth out the volatility of their portfolio.

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