Shares of Facebook, Inc. (FB) were on a tear last year, with the stock setting new highs seemingly every month. While shares in the social media giant have had a huge run since 2012, much of last year's gain happened in the first seven months of 2017. Since then, the stock hasn't seen double-digit upside, leading E*TRADE to predict that Facebook shares could trade "sideways."
"A trader mulling over this situation may consider the fact that FB, while maintaining an overall upside bias, has had trouble establishing a clear uptrend in recent months," wrote E*TRADE Financial Corporation (ETFC) in a recent blog post. "Also, there appear to be few catalysts on the near-term horizon with the potential to launch a big move."
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On the flip side, E*TRADE noted that Facebook stock has held up despite the fallout after the U.S. election. With Russia permeating social media and spreading fake news on the platform, Facebook has come under attack for not doing enough. The company has since rolled out fixes that it says will prevent a repeat of 2016 during the midterm elections in 2020. The criticism could have caused the shares to plummet, but the stock has been able to stand up to the negative news flow, implying that there is no reason to expect a meltdown, E*TRADE wrote.
For traders wanting to get in on Facebook but with no clear direction expected either way, the New York-based online brokerage said that investors could consider a short strangle in which they sell a call option with a strike price that is above the current stock price and at the same time sell a put option with a strike price below where the stock is currently trading. "If we expect FB to continue to trade mostly sideways – but also accept the possibility that it could slightly penetrate either side of the of the $167.18 to $195.32 range defined by the February high and low – we could sell a call option somewhat above this range and sell a put somewhat below it," wrote E*TRADE. "One of the advantages of a short options strategy is that 'time decay' is on your side – options naturally lose value as time passes, and that depreciation accelerates as expiration approaches."
The online brokerage noted that there are some trade-offs with this trading strategy, including the fact that the maximum profit is capped and the risk, in theory, is unlimited if the stock price pushes above the strike price of the call or moves below the put's strike price.