A Cheap And Safe Way To Own Facebook With Synthetic Stock And A Married Put

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 |  About: Facebook (FB)
by: W. Edward Olmstead

There continues to be considerable interest in owning the stock of Facebook (NASDAQ:FB) even though its performance has been a disappointment since its IPO in May. At its current level of $20.40, it might be a bargain, but it could also continue lower before it finds some significant support. Here is a cheap and safe way to own FB into January 2013 (and possibly beyond).

This cheap and safe way to own FB into the beginning of 2013 uses a combination of options. Instead of buying the stock, a call option will used as a synthetic version of the stock that costs less than $6 per share while providing over 80% of the FB price movement. To protect the synthetic stock, a married put option will be used to limit loss in case the stock continues to move lower. Finally, the cost of the married put will be substantially reduced by selling a near-term strangle.

Here are the details of the trade base upon a one contract position (100 shares): Buy 1 Jan (2013)16 call for $5.70 per share. Buy 1 Jan (2013) 20 put for $3.20 per share. To reduce the cost of the put, sell 1 Sept 22 call for $.90 per share and sell 1 Sept 18 put for $.70 a share.

At the September expiration date (9/20), this trade will show a small profit if FB is trading between $18 and $26. After the September expiration date, this trade has the potential for unlimited profit with a maximum risk at the January expiration of only $3.30 per share. Actually, the maximum risk is less than $2.00 per share prior to the beginning of December.

When the January expiration date is reached, you can continue following FB by repeating the synthetic stock/married put trade for another 5-6 months. You would also have the choice of buying FB stock for $16 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.