Over the last 6 months FB has been a favorite of mine, in which to sell cash secured puts. Why? The stock has been going up and option premiums have been high. Is that a great combination for cash secured puts? You bet your britches! 

Recently, the stock has backed off since earnings and premium levels have come down quite a bit (shares were above $32 on Jan 28th). Do you still like FB for Cash secured puts? Yes, I am more comfortable with a little pullback in the stock since earnings. it was going up too fast. As far as premium levels, as measured by implied volatility, current levels in the mid 30’s aren’t near the 50 level of recent months, but it’s not bad.

Trade Idea: FB $28.00 (off $0.26) Sell 1 March 27 put for $0.60

Commentary: If the stock goes against you to the downside, you are committing to buy the stock at the strike of the short put less the premium. That means if you get assigned, your purchase price of the stock would be $26.40 (prices exclude commissions). If the stock doesn’t go under 27, you collect the premium of .60, which if I did this in a margin account, would result in yields around 10%. 

What is the probability the stock will finish under 27 by March expiration? One clue is to look at the delta of the short put, which is about 30. That means there is only a 30% probability that FB will be under the current price of ~$28.00 by March expiration.

Have a great day and check out our website for our new class starting Friday on Weeklies.

Dan Sheridan