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Facebook Inc (FB) and the $1.5 Million Bullish Bet

Facebook Inc's July calls were used to initiate a bullish spread on Friday

by 5/27/2014 9:41 AM
Stocks quoted in this article:

Option Brief: Facebook Inc (NASDAQ:FB) saw a modest rise in call activity on Friday, with the contracts trading at a 10% mark-up to the average daily pace. By the numbers, around 271,000 calls changed hands throughout the course of the session, compared to 118,000 puts. Diving deeper reveals one trader gambled on an extended run higher for the social media concern, but took a more conservative approach to her bullish bet.

Specifically, one large lot of 34,384 July 67.50 calls was bought above the ask price for $1.08 apiece, while a symmetrical block of July 70 calls was simultaneously sold at the bid price of $0.64. Open interest rose at each strike over the weekend, confirming the addition of new positions. Summing it all up, it seems safe to say that a long call spread was initiated for a net debit of $0.44 per pair of contracts.

The ultimate goal is for FB to finish at or above $70 at July options expiration, but not so far above that the trader regrets capping her profits with the sold calls. She still stands to profit, though, once the stock climbs above the breakeven mark of $67.94 (bought strike plus net debit). However, due to the sold call, her profit is limited to $2.06 (difference between the two strikes, less the net debit) per pair of calls, regardless of how high FB might soar.

Meanwhile, although the short call does reduce the profit potential of the play, it also reduces the risk. Should FB expire south of $67.50 at the close on Friday, July 18 -- when back-month options expire -- the most Friday's spread strategist stands to lose is the initial cash outlay of roughly $1.5 million (34,384 pairs of contracts * $0.44 net debit * 100 shares per contract). Had she simply bought the 67.50-strike call, her risk would be a much steeper $3.7 million (34,384 contracts * $1.08 premium * 100 shares per contract).

On the charts, Facebook Inc (NASDAQ:FB) has been in rebound mode, after succumbing to the early spring sell-off in momentum names. In fact, thanks to newfound support from its 160-day moving average, the equity is up more than 12% from its April 28 intraday low of $54.66 to trade at $61.35. Off the charts, CEO Mark Zuckerberg has been summoned to appear in an Iranian court over privacy complaints.

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