My Personal Facebook

Oct.24.12 | About: Facebook (FB)

Click to enlargeIf this article was about my personal collection of Facebook "friends" it would truly be summarized in a single line.

Although I suppose I should be introspective about the paucity of those friends, just as I should question why it is that my Google+ Circle is composed of only a single point.

Rather. My Personal Facebook (NASDAQ:FB)" came to an end this morning when I sold my shares following Facebook's second attempt at releasing its public quarterly earnings.

Back in August 2012, just days before an important lock up period was about to come to an end, I posted an article on Seeking Alpha, "Facebook is Compelling Me" that garnered nearly as many comments as it did readers.

To suggest that my rational for buying shares was equated to idiocy would be elevating depressed intelligent quotients to rarefied levels. To say that the comments were emotional and absolutely certain of Facebook's continued downward spiral would be fair.

To say that the comments were based upon anything above the "Hoodie Metric" would itself be suspect.

My point and my strategy with all positions into which I enter is to not get terribly caught up in issues that come and go, as long as there is no evidence of an irreparably broken company. There was no question that an upcoming lock up expiration would be a challenge to share price, particularly since the share price was already quite depressed relative to its IPO level.

It was very hard for me to understand how those, seemingly as ill informed as I, on the business of Facebook could have such certainty of opinion. I, on the other hand, approach each position with a thesis, but predicate the entire thesis on an over-riding sense of doubt. My certainty always revolves around how uncertain I am of most anything in the future.

That is why I sell covered calls and that is why I sell puts on positions. It's simply an insurance policy to help fund my uncertainty and cushion the fall if my uncertainty leads me to an open window. Rather than being a passive observer and rather than simply following consensus, the idea is to manage your positions in an attempt to ride out the waves that come along for every publicly traded company. You could also take the initiative to close the window unless you know for certainty that there is unbridled opportunity on the other side.

Purchasing shares of Facebook a few days before the lock up expired was an example of my typically bad market timing. While I still held on to the thesis that the lock up would be a non-event in the big picture, I could have waited a couple of days and achieved a better entry level. Instead, I found myself more actively managing the position in the immediacy of that expiration.

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As I sold my shares of Facebook, the final ROI was 16.3% based upon the above Table that chronicles option revenues from the sale of puts and calls in support of the underlying position. The return, is actually understated, as while there was always a one to one relationship between the number of shares and call contracts sold, the number of put contracts sold was out of proportion to the number of shares already held. For purposes of this presentation, the ratio is one to one for all hedging transactions, as well as to protect my privacy from all other than the Internal Revenue Service.

For me, the sale of puts is not an unusual position to take in support of a position demonstrating a paper loss and in support of an underlying conviction. It's just a variation on the "Having a Child to Save a Life" strategy to chip away at the losses.

For subscribers to Option to Profit, however, the return was only 12.1%, as put sales were not sent as Trading Alerts, but rather as messages of trades that I took for my personal accounts. Such messages are an indication of steps that I take for support of existing paper losses on positions, but are not "recommendations." Some subscribers select to follow those additional steps, while others may feel doing so is unwarranted in the face of existing paper losses and uncertainty with regard to the health of the position.

In the case of Facebook shares, the opportunity to sell calls during the period of ownership was greater than I would have liked. In fact, the period of ownership, a bit more than 10 weeks, was already quite a bit longer than my typical holding.

As an exercise and as a means of confirming or invalidating a specific investment thesis, I always compare each transaction, or in the case of a bundle of transactions that are in support of a single position, to the S&P 500 for the exact period of ownership.

In this case, the S&P 500 stood at 1406 when the Facebook position was initiated and then at 1412 when closed, for a gain of 0.4% for the period.

So as the August 13, 2012 shares are now gone to others that have a sense of confidence that the climb will continue above the $24 level, Facebook is again preparing to face another lock-up expiration in just 3 weeks. The next expiration, on November 14, 2012, dwarfs the previous one is size and quality, in that insiders, venture capital funders and even Mark Zuckerberg will be allowed to sell shares on the open market.

Again, I'll be looking for opportunity.

Not friends.

Disclosure: I am long FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.