Risk Reversal with Facebook Shares
An options strategy if you believe the following to be true:
- The stock price is attractive.
- The stock price will benefit from long-term trends.
- The stock price is currently volatile / unpredictable.
The strategy involves selling high in the options market to buy low in the stock market. As the article puts it, sell cash-secured puts to “monetize fear and get paid by the options market to buy stock.”
Using figures cited in Barron’s, and Facebook trading at around $175 at the time, the bet would be placed accordingly:
- Sell the May $165 put for $5.70.
- Buy the May $180 call for $6.75.
“The so-called risk reversal—selling a put and buying a call with a higher strike price but a similar expiration—is designed to catch Facebook’s first-quarter earnings report.”
For a total trade cost of $1.05, an investor will profit if the response to earnings causes the price to rise above $181.05. The risk is that the earnings report, or any other catalyst, causes the price to drop below $165. But, if you believe that on a long enough time horizon Facebook’s share price will outperform, then in your worst-case scenario you only need the cash long enough to ride out the pandemic.
Source: Steven M. Sears | “Facebook Is Winning the Pandemic. How to Bet on Its Renewed Dominance.” | Barron's | 4/9/2020 | Visit