Facebook (FB) Buy-Writes


The market is trading lower by 0.8% this morning on news that the International Monetary Fund walked out of talks with Greek officials citing "major differences" over how to save the country from bankruptcy. With this morning's selloff, the market is once again unchanged for the week.  

Just as in recent weeks, the market neared the bottom of its recent range earlier in the week and bounced, and neared the top of its recent range and sold off. To say this price action is choppy and that the constant Greek headlines and rumors is becoming an annoyance would be major understatements.

As I’ve mentioned recently, 2015 has been the year of the buy-write.  Almost six months into the year the S&P 500 is trading higher by only 2.21%.  Similarly Facebook (FB) is up 4.41% for the year.

This morning I went back and looked at how a simple buy-write strategy would have performed in FB if executed the same way each month.  The strategy would be to buy the stock and sell a call several dollars out of the money each month once the call initially sold had expired.

For this exercise, I theoretically bought FB stock at 78.50 on January 2, 2015 and sold the January 80 Call for $0.80.  On January 1/16 this call expired worthless as the stock closed at $75.18.  I theoretically collected my $80.

On 1/20, the Monday after the January Call expired, I sold the February 80 Call for $1.45.  On 2/20 FB stock closed at 79.90 and my call expired worthless.  I collected my $145.

On 2/23 I sold the March 85 Call for $0.50.  On 3/20 FB stock closed at 83.80 and my call expired worthless. I collected my $50.

On 3/23 I sold the April 87.5 Call for $0.65.  On 4/17 FB stock closed at 80.78 and my call expired worthless.  I collected my $65.

On 4/20 I sold the May 85 Calls for $2.00.  On 5/15 FB stock closed at 80.42 and my call expired worthless.  I collected my $200. 

If I had put on this trade I would have collected $540 as of May expiration on calls sold several dollars out of the money.  This premium collected is a yield of 7.38% vs. a stock return of 4.41% for FB on the year. 

As I’ve said, buy-writes are not my favorite options trading strategy.  And hopefully straight call/put buying will become the best trading strategy again soon.  However, in this choppy market I have to adjust to the market conditions to best profit, and at least for now buy-writes and volatility selling strategies are working best. 

Stock Picks


This stock could rise 50% before becoming fairly valued.

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