The Facebook stock crash (more than 20%) after the stock market closed on 25th July following the announcement of the quarterly figures. This exceptional situation has created a good trade opportunity and we will show you the details in this article.

Facebook stock crash (20%)

Facebook released on July 25 its earnings and felt to $164.30 (almost 25%). Until market opening, the price had recovered slightly to about $175:

Such a stock crash of a giant is not the order of the day, but usually, the proportions are smaller. Even if the heavy fall of the stock is only partly rated as an overreaction by the market participants and estimates that some market participants will buy shares at a discounted price, one quickly concludes that the share tends to run towards $180 or even $190. In our view, it was more likely that Facebook will rise or stagnate slightly than that it continues to go down.

Using a crash profitably

Team-internally, there were many considerations on how to take advantage of this situation, each variant has advantages and disadvantages, and it must be carefully considered which variant offers the best risk-reward-ratio.

Possible options:

  • Buy the stock
  • Buy the stock and sell calls against it
  • Sell short-term puts
  • Sell long-running puts

Under normal circumstances, selling the options after the quarterly report has been published is not the best idea. The reason is simple: implied volatility collapses.

On Facebook, however, the price plunge was so great that even the implied volatility (IV) after disclosure of corporate figures continued to increase. This is a great advantage for option sellers because they benefit from a falling IV, as this drops the option price.

Covered Calls on Facebook with one day remaining

Ultimately, we decided to make a very extraordinary trade and bought 100 Facebook shares while selling call options with just one day remaining to almost identical strike (ATM). Normally, the premium income is extremely low with extremely low residual maturity and a covered call is not worthwhile. In this case, the entire spot was very attractive.

Trade setup for Facebook

We bought Facebook for $178.51 and sold a call option with a $180 strike. The premium income for the call was $370. This is really remarkable considering that this option has only one day till expiration and the intrinsic value is only $149.

Our assumption was that Facebook closes on Friday (27.07.) over $180. In this case, our profit would be $519. If Facebook closes below $180, we’ll take the full premium and we are going to sell a further ATM call option on Monday (30.07.).

Where is the risk in this trade?

The risk is on the downside. If Facebook falls further, the premium income only covers the losses up to a price level of $174.81. So, it remains to be considered whether to put a safe stop loss in the market for the stock, which is e.g. 1% of the account size. In our case, that would be $1,000, which is exactly a $10 move of the stock price for the 100 Facebook shares we bought. Ideally, this also corresponds to the lowest price reached after the stock market was closed.

How do you close a covered call?

There are different variants for closing a covered call depending on the movement of the stock:

  • Stock rises and is sold through the call option
  • Stock falls and you take the premium > share still in the account and must be managed
  • Sale of the entire covered call as a combo (sell a Buy Write)

Interesting is the third variant for our trade. If you had bought this trade as Buy Write, then it would have been at $174.81, which is hardly surprising at our break even point. If you do not aim the full profit of $519, but e.g. $400, we could sell the entire covered call as a combo for $178.81 as well.

Where can I see these trades live?

We inform all premium members in our signal and chat community about all trades and discuss our motives and further details.



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