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http://www.Options-Trading-Education.com - Trading Facebook Options - In light of the upcoming Facebook IPO we add this discussion of trading Facebook options to our previous musings on GM options and trading puts on LinkedIn options.
According to press reports Facebook is soon to announce that it is going public with a $10 Billion offering in stock.
Speculation puts the anticipated value of the soon to be public company at $75 to $100 Billion. Many are saying this will be the hottest IPO since Google.
In the three and a half years after Google went public its stock climbed from $100 a share to $700 a share in the three and a half years that preceded the 2008 stock market crash.
Many expect the same rise in price for Facebook as private investors flock to the soon to be popular stock.
Because not all promising stocks keep going up and because such stock often become oversold and correct significantly, trading Facebook options may end up being more profitable that simply buying the stock.
Six days after the IPO opens rule will permit that Facebook becomes available for options trading.
Traders will have thoroughly analyzed fundamentals and will closely watch market sentiment.
If the expected excitement of private investors comes to pass, the stock will likely become overbought.
Traders seeing that situation coming will buy puts on Facebook.
Traders who expect to see the stock keep climbing will buy calls.
Hedging risk with options will also be useful for those who get in early and see a substantial stock rise.
Investors who believe that Facebook will replicate the Google experience will not want to sell their stock too early.
On the other hand they may choose to protect their gains.
They can do this by buying puts on Google while holding their stock.
If the stock continues to rise the investor will simply have paid insurance in the form of his put contracts.
However, if the stock falls in price he will be able to sell the stock at the options contract price and purchase again at the now lower price.
On the other hand he can also simply exit the options contract and use his profits to offset a loss of share price.
As volatility of the stock increases that could also increase the price of both puts and calls when trading Facebook options.
As we often remark, selling options tends to be more profitable over time than buying them.
However, selling options in a volatile market is the work of professionals backed by large institutions with deep pockets.
For small investors selling can be risky business.
One useful tactic for anyone interested in trading Facebook options could a long straddle.
The trader buys both calls and puts with the same expiration date.
He will win whether the stock goes up or if it goes down.
His cost of doing business is the price of the options contracts.
As always do your homework and stay out of trades that you do not understand.