Option Trade – Facebook (FB)
Wednesday 30, 2012

Facebook Shares Plunge Again: Will Options Trading Fuel More Volatility?

Facebook’s stock should trade for $13.80!

Add FB Puts

by Ian Harvey

*OPTION TRADE: Buy the Facebook FB Jul 2012 25.000 put (FB120721P00025000) at or under $1.15, good for the day. Place a protective stop limit at $0.50 and a pre-determined sell at $2.30.


Since Facebook eked out a small gain on its first day of trading with the support of its lead IPO banker Morgan Stanley, the stock has slid amid both fallout from technical glitches as well as questions about whether the offering's size and price together overwhelmed demand. Facebook has seen big drops in three of its six full days of trading.

And, Facebook just keeps on sliding. Facebook shares slid another 9.6% Tuesday, as options trading began and investors placed largely negative bets on the stock's future.

The stock dropped under $30 per share and closing at an all-time low, $28.84, a 24 percent drop from its initial public offering price of $38 on May 18.

About $US25 billion has been wiped off Facebook's $US104 billion float valuation.


Description of Facebook

Facebook, Inc. (FB) operates as a social networking company worldwide. The company builds tools that enable users to connect, share, discover, and communicate with each other; enables developers to build social applications on Facebook or to integrate their Websites with Facebook; and offers products that enable advertisers and marketers to engage with its users.

As of February 2, 2012, it had 845 million monthly users and 443 million daily users. The company was founded in 2004 and is headquartered in Menlo Park, California.

Reasoning for the Option Tip

There are many reasons that stand-out for the continued decline of the shares of Facebook!

Facebook’s IPO

There’s no doubt that Facebook’s debut has been disappointing for investors who had gone into the IPO with high hopes about its possible performance. Nearly everything about the offering has failed to meet expectations. From the beginning, Facebook was plagued by opening glitches on the Nasdaq, which were followed quickly by reports that the debut’s underwriters may have given more information to select investors.

Facebook's debut has been one of the worst performing of any large company, according to data tracker Dealogic. Facebook's market capitalization loss so far exceeds the current market capitalization of Dell Inc. and the market capitalization of Google Inc. at the time of its offering.

No Comment

It is also a disturbing fact that Facebook, in a so-called quiet period following its offering, has declined to comment on the share-price decline.

Facebook's latest stumble came in spite of a broader market rally. The Dow Jones Industrial Average rose 1% and the Nasdaq Composite Index gained 1.2%, as technology stocks led much of the gains for the day.

Analysts’ Insight

Still, questions remain about Facebook’s viability that have little to do with its stock price. The social network doesn’t offer clear goods or services.

To succeed, Facebook will have to move beyond the problems of its debut and show it can move its product forward — something not all analysts are convinced the company can do.

Analysts say, Facebook’s business model doesn’t show it can sustain major advertising revenue off of its social data: General Motors announced that it was going to stop advertising on Facebook just days before the IPO.

Moving Out of Comfort Zone

Facebook has also failed to generate the same kind of revenue through mobile devices as it has on traditional computers, a growing problem as the site’s audience shifts to smartphones. The company is trying to address this with a combination of acquisitions, such as its $1 billion purchase of Instagram in April, and attempts to innovate on mobile ad formats. There have also been reports that the company may be trying to fix its mobile problem by working on its own smartphone.

Analysts believe that Facebook should be wary of doing anything too far out of their core business before figuring out its revenue problems -- the company is in danger of losing focus after producing one good product.

The company’s finances stream is not secure – they haven’t locked up revenue.

The Real Price

MarketWatch columnist, Mark Hulbert, certainly let the cat-out-of-the-bag with his statement.....

”Assuming that its five-year return is equal to the stock market’s long-term average return of 11% annualized, Facebook shares currently would need to be trading at just 13.80.”


Therefore, it is a foregone conclusion; unless some miracle asserts itself, we will see shares of Facebook, continue to decline, which provides us with the opportunity for the following options trade!

*OPTION TRADING PLAY: Buy the Facebook FB Jul 2012 25.000 put (FB120721P00025000) at or under $1.15, good for the day. Place a protective stop limit at $0.50 and a pre-determined sell at $2.30.

”Success is simple. Do what's right, the right way, at the right time.”

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