THE BACKDROP Strong uptrend still in place in the longer term time frame. In the medium-term, some mixed signals and hesitation. Short-term, the stock continues to show strength by testing its intraday all time high at 190.66, ahead of earnings publication tonight. FB also remains one of the best growth stories out there, and a “generational” stock to hold for the long term in my opinion, as long as the market uptrend remains unchallenged.
HOW TO PLAY THE EARNINGS? Earnings disappointment could take the stock significantly lower - Perhaps all the way to the MA200 at 167.50 (-11.2%), especially in an overbought market looking for consolidation. In this context, I would like to be exposed to a positive surprise by purchasing an OTM call slightly at or above the historical high.
Buy Feb2'18 $192.5 Call = 3.55/share (indicative)
Buy Feb2'18 $195 Call = $ 2.60/share (indicative)
RISK ANALYSIS Stock does well —> Benefit from holding the Call Stock does poorly —> Sell OTM Put to payback the lost call premium Stock does nothing —> Lose the premium (worst-case and least probable scenario, in my opinion)
Maximum upside = Unlimited Maximum downside = Value of the call premium = 2.63/share - 3.55/share = 1.40% - 1.89%