A Technical Traders Successful Option Trade

Facebook is a hot momentum stock that has found its way on trading lists for many traders, myself included. Facebook stock and options have strong liquidity, decent volatility to trade typically, and the stock price is generally momentum driven.  Generally speaking, if technology stocks are working Facebook (FB) is moving higher, however the same can be said regarding technology sector weakness.

Earlier in the year, Facebook was consolidating in a price range between around $54.50 per share to around $63.50 per share. From late May into the early part of June, FB pushed to the upside toward $68 per share as can be seen below:

Chart1 (1)

The move to the upside in Facebook stalled at the end of June and price dropped rapidly at the beginning of July. FB opened on July 1st at $67.58 per share. By July 8th, Facebook closed trading at $62.76 per share, a drop of more than 7% in a very short period of time.

As a contrarian trader, I immediately became interested in taking a long trade to capture a quick pop higher in Facebook. On July 9th, I entered a FB Call Diagonal Spread which would benefit from the passage of time as well as higher prices in Facebook.

The trade was constructed in the following manner:
Buy to Open 1 FB August Monthly 62.50 Call
Sell to Open 1 FB July Monthly 70 Call

The total trade was executed at a cost of 4.93 per spread or a maximum risk of $493 per spread. On July 15th, the trade was closed for a credit of 6.04, or a profit of $604 per spread. The trade resulted in a gross gain of $111 per spread, or 22.51% based on maximum risk undertaken per spread. The Facebook stock chart during this period of time indicating higher prices is shown below.

Chart2 (1)

This trade was taken in our new options service and members were able to capitalize on a very profitable trade in a fairly short period of time. This trade was taken with about half the normal risk that the service opens new trades with as it is an opening debit trade which typically constitutes smaller position sizing based on the service’s strategy.

Overall, the new service is off to a great start in terms of performance and the service is sending out nearly one new trade per day for members. Primarily we focus on credit spreads and more advanced option trades, but from time-to-time we do sprinkle in some basic long options for directional trades in the S&P 500 Index (SPX) and the Volatility Index (VIX). The FB trade is just another great example of how advanced option strategies can produce very strong returns in a fairly short period of time!

Join Us Today at: http://www.thetechnicaltraders.com/options/

Chris Vermeulen