Stocks quoted in this article:
Facebook Inc (NASDAQ:FB) is slightly higher this afternoon at $74.93, bringing the stock's year-over-year gain north of 81%. In the options pits, calls are outpacing puts -- 64,000 contracts to 49,000. Short-term bets are in vogue, as seven of the social network's 10 most active strikes are expiring at this Friday's closing bell.
Along those lines, an interesting two-legged trade transpired during the lunch hour, when matching blocks of 1,890 weekly 8/29 73.50- and 74-strike puts were exchanged. The higher-strike puts were sold to open for $0.35 each, while the lower-strike puts were bought to open for $0.24 each, yielding an initial net credit of $0.11 per pair of contracts. In other words, this speculator is employing the neutral-to-bullish short put spread strategy.
In a nutshell, the trader expects FB shares to remain above $74 through this Friday's closing bell -- when the weekly options expire -- allowing him to retain the initial premium collected, or $20,790 (net credit * number of pairs of contracts * 100 shares per contract). Conversely, if the stock dips below $73.89 (sold strike less net credit), his losses will begin to accumulate on a move down to $73.50 (the bought strike), for a maximum potential loss of $0.39 (difference between the strikes, less the net credit), or $73,710 total. While the risk seems steep, it's much more modest than that of a "vanilla" short put play, where losses would accumulate all the way down to zero.
Earlier this month, the 74 strike served as a layer of resistance for Facebook Inc (NASDAQ:FB), but now appears to have switched roles to act as support. As such, delta for the sold put is negative 0.27, representing a mere 27% chance the contract will be in the money at week's end.