What’s up everyone, It’s Cody here.
In this video, I will share with you why Facebook could be the best stock to sell put options in 2020
I will jump right into an actual trade I am looking at this moment to help you understand!
When the market closed on July 10th, Facebook’s stock price was around $245.
If I want to own 100 shares of Facebook, I could either buy 100 shares of the stocks outright
or I could sell 1 put option.
Buying the stocks outright makes me vulnerable to any sudden price pull back.
On the other hand, If I sell 1 put option at $245 expiring on July 31th, I will get
paid around $1,200 as premium.
If the stock price is above $245 by the end of July 31th, I will keep the $1,200 and the
contract will expire.
I can repeat this process to generate more passive income.
If the stock price is below $245 by the end of July 31th, I need to buy 100 shares at $245.
Thanks to the $1,200 premium I received upfront, my true average cost of owning the stocks
will be $233 instead of $245.
Instead of buying stocks, selling puts has been consistently generating thousands of
dollars passive income for me every month.
This strategy allows me to live life on my terms and have more time to ask you to smash
the like button for me.
I will break down this video into 3 parts: Part 1: Intro to selling put options: where
I will introduce the concept in simple terms Part 2: Why sell put options on Facebook
Part 3: Walk you through my FB trade execution
Let’s get right into my Part 1: Intro to selling put options
The selling put options strategy allows you to potentially own your stocks that is lower
than the current stock price at the expiration date.
You will receive a premium upfront regardless of where the stock price is at by the end
of the expiration date.
The core of this strategy is to allow you to potentially own the stocks you want to
own anyways at a discounted price.
It allows you to become an insurance company where you sell insurance policies to customers.
You take calculated risk and make sure that odds are in your favour.
And that’s exactly why you see big insurance companies own a lot of the major buildings
in the downtown area.
One key thing to keep in mind is that you must be comfortable to own the stocks at the
price you sold the puts for.
You also have to be comfortable with the quality of the underlying stock.
Do not sell puts on stocks you do not want to own just to collect the premium.
Part 2: Why sell put options on Facebook With mega companies joining the Facebook ad
boycott, will Facebook’s stock price continue to grow?
To answer this question objectively, I will go through Facebook’s technical charts first
then move on to the fundamental analysis.
From the 5 year chart, we can see that Facebook's 50 day moving average has been consistently
above the 200 day moving average for the past 5 years.
Both the 50 day and 200 day moving averages are showing a healthy upward trend.
Before the global beer outbreak, Facebook had reached it’s all-time high at $222.
Due to the panic in the overall stock market, Facebook’s stock price plummeted 35% to
$145 within a 1.5 months period
Even though the sell-off was fierce, the stock price never broke the key support levels from
the major pull back at the end of 2018.
The support levels continue to climb higher as the stock price trending upwards.
What amazes me the most is that the major sell-off lasted for 1.5 months but it only
took Facebook 2 months to recover back to the previous high.
The Facebook stock price showed a nearly perfect V shape recovery and a strong resilience regardless
of the cautious sentiment in the market.
Within a month of recovering to the previous all-time high, the stock price continued to
climb higher as other sectors like banking and brick and mortar businesses are struggling
to gain confidence.
When the mega companies like Coca-cola, Microsoft and Starbucks threatened to boycott Facebook’s
ad in June, Facebook experienced another sharp sell off.
However, the sell off never broke the 50 day moving average.
The stock price again demonstrated a strong V shape recovery to create a new all-time
high.
From examining FB’s 5 year to 1 year chart and all the major market cycles, It seems
like Facebook is still winning the popularity contest among investors.
The trend is your friend - I will be expecting the healthy rally trend to continue.
From the fundamental standpoint, you need to ask yourself are you ok owning Facebook
stocks for the long-term.
Are you confident enough to buy more of the stock if the price goes down significantly?
It’s sort of like what Marilyn Manroe said : If you can’t handle my worst, you ain’t
getting my best”
Mega companies spun up the idea of boycotting Facebook in a matter of days.
Those companies who boycotted Facebook did not cancel their ad accounts but instead put
them on hold.
I am not downplaying the significant meaning behind the entire boycotting.
However, we have to remember this is an election year.
Crazy things happen in an election year.
We have to ask ourselves that once the boycotting momentum and the election are over, where
are the mega companies promoting their ads in the future?
Is there any other social media platform that has the same reach and engagement as Facebook
at the moment?
Almost every person on the planet has at least one social media account.
Facebook is, undoubtedly, the largest and most popular social networking site.
The company has more than 2.5 billion active users every month.
This is roughly one-third of the population on this planet.
Facebook stock has a market cap of $681 billion.That makes FB stock the fifth most valuable company
on the S&P 500 index, behind Apple, Microsoft, Google, and Amazon.
So Who are Facebook’s major competitors?
Instagram is the number 1 competitor so Facebook bought Instagram in 2012 for $1 billion.
Instagram is now estimated to be valued at more than $100 billion.
Since it’s technically the same company, it’s not competing in revenue anymore.
Snapchat is one of the newer kids on the social media block.
Snapchat went public in 2017 but hasn't generated a profit.
So the Earning Per Share is negative and P/E ratio is not applicable.
If Snapchat failed to generate profit in the future, Facebook might eventually buy out
Snapchat to grow the Behemoth.
LinkedIn is designed more for business and professional networking.
Linkedin’s 6.8 billion revenue in 2019 is considered trivial to Facebook’s 70.7 billion.
Twitter also competes with Facebook for users and its engagement, but limiting it to 240
characters per tweet makes it less effective in competing with Facebook.
Twitter reported a $3.45 billion in revenue in 2019, which is even lower than Linkedin.
Therefore, we can conclude that all the major competitors are either acquired by Facebook
or not playing in the same major league with Facebook.
Part 3: Walk you through my FB trade execution
Back to the same trading screen at the beginning of the video, this is my option chain for
Facebook.
Facebook stock is currently around $245.
There are some expiration days up top and some strike prices right below the expiration
day.
Strike price is the price you agree to buy 100 shares of the stocks.
You only agree to buy the stocks if the stock price closes lower than the strike price by
the end of the expiration day.
There are bid and ask prices on each side of the strike price.
These numbers represent the amount of premium you will receive upfront if you sell one contract.
Since you are selling put options, you will focus on the puts side.
One put contract represents 100 shares of the stocks so we will need to times the amount
by 100.
For example, at the $245 strike price, I will get paid a premium between $11.85 and 12.35.
So you will be receiving around $1,200 of premiums.
You probably noticed that the lower you choose our strike price, the less premium you will
receive.
And this is because the lower the strike price, the less likely you will need to buy 100 shares
of the stock.
This is the same idea as insurance companies will ask for less premium if the policy is
designed for a lower risk individual.
I will not go into details why I chose the July 31 expiration days.
This is too much information for you at the moment.
I will cover that topic in the future video.
Don’t forget to subscribe to this channel so you don’t miss any video.
So far I have decided to sell put options instead of buying stocks outright to avoid
the stress of the stock price fluctuation.
I have also decided that I want to own Facebook stocks for the long-term.
Now the only question is what strike price should I pick?
I will usually go back to the 1 year technical chart and pick a strike price where I think
the stock price will not be at by the end of the expiration day.
Currently the 50 day moving average around $230.
Since the 50 day moving average is a strong support line, I will pick a price right below
it.
Also, we can see that the last major sell-off bottomed at around $216.
So this is another strong support level.
I will pick a strike price right below it.
I will come back to my option chain and see how much premium I will receive for selling
a put option between $215 and $225.
If I pick the strike price of $215, I will receive around $248 as a premium for setting
aside the money for 20 days.
This is roughly a 1.15% return in 20 days and an annualized return of 21%If I pick the
strike price of $225, I will receive around $450 as a premium.
This is a 2% return in 20 days and an annualized return of 36.5%.
Since both annualized returns of 21% and 36.5% are above the average return of S&P 500 Index.
I will be happy with both returns.
It really comes down to your own risk and reward appetite.
Do you enjoy the video so far?
This video is a bit more hands on than my previous video.
Make sure you also watch my previous video to better understand the strategy.
My goal is that you can grow your financial literacy along with me and live life on your
terms sooner!
Take a moment here and dig deep into your investing experience so far.
You spent days doing research on the companies’ fundamentals and technical charts.
And while you were doing that, the stock price kept increasing by 1%, maybe 3% day after
day.
Finally, you convinced yourself that if you don’t buy it now, you will never get to
buy it.
You finally bought the stocks.
The next day, the stock price started pulling back, or making it worse the stocks continued
to pull back for the next couple days.
And you were questioning your investing skills, your intelligence or even wondering if it’s
still the same stock you wanted to buy a couple days ago.
The story I just shared is actually my own story.
If you can relate to this story, don’t forget to smash the like button until it turns blue
because I just share with you how to make money whether your stocks go up, down or sideways.
Good job on staying until this part of the video and you all are my true supporters!
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Thanks for watching and see you next time!