More Problems, But They Don’t Matter For This Company
Some companies are prone to problems. They stumble time after time, often in respect to the same general problem. It might be a poor production process, too little capital or aggressive management decisions that go awry.
Sometimes, these problems can destroy a company. At other times, the company is able to shrug off problems. When the company continues to deliver strong results despite persistent problems, the reason is most likely growth in sales is providing room for errors.
Facebook (Nasdaq: FB) is an example of a company where growth allows the company to overcome problems that seem to keep cropping up.
Insurance For Your Investments? The Answer...Options
Investors are reevaluating how to do things in 2021. With Options, a stock’s price can drop to zero, but you can never lose more than the option’s premium and you know the full amount at risk right from the get-go.
Options are the most dependable form of hedge, and this also makes them safer than stocks.
More Data Sharing Concerns Arise
Facebook is back in the news after a late night data dump. The company delivered a 747 page report to Congress late last week.
FB provided the document to the Energy and Commerce Committee of the U.S. House of Representatives in response to hundreds of questions from the committee, which quizzed Facebook Chief Executive Mark Zuckerberg during testimony in April.
The committee noted that it received the responses shortly before midnight on Friday; the deadline for the responses was the close of business Friday.
In the report, Facebook revealed that “it gave dozens of companies special access to user data, detailing for the first time a spate of deals that contrasted with the social network’s previous public statements that it restricted personal information to outsiders in 2015.”
The Wall Street Journal reported that,
“The company disclosed it was still sharing information of users’ friends, such as name, gender, birth date, current city or hometown, photos and page likes, with 61 app developers nearly six months after it said it stopped access to this data in 2015.”
In addition, five other companies “theoretically could have accessed limited friends’ data” because of access they received as part of a Facebook experiment, the company said in the document.
Ime Archibong, Facebook’s vice president of product partnerships, acknowledged the preferred deals in an earlier interview with the Journal, but said they were with individual developers to test new features or when winding down products.
He said that the company maintained a “consistent and principled approach to how we work with developers over the course of the past 11 years.”
This is a continuing problem for the company. Access to user data has been in the news since it was revealed that political analytics firm Cambridge Analytica, which aided President Donald Trump’s 2016 presidential campaign, purchased data on 87 million users without their consent.
The social network also said it shared information about its users with 52 hardware and software makers, including big U.S. companies such as Amazon.com Inc., Apple Inc. and Microsoft Corp., as well as some Chinese firms such as Huawei Technologies Co. and Alibaba Group Holding Ltd.
Fourteen companies continue to have access to information about Facebook’s users, the document said.
These partnerships “do not involve data sharing with partners for their independent purposes,” Mr. Archibong said in a statement on Sunday.
Facebook allowed this access so these companies could create versions of Facebook for their devices, provide “hubs” where users could see notifications from Facebook, allow users to sync Facebook contacts and photos on their devices and send users notifications from Facebook via text message.
“These integrations were built by our partners, for our users, but approved by Facebook,” Facebook said in the document delivered to Congress.
The News Might Not Matter to the Stock
For traders, the question is whether or not this latest revelation will affect the stock price. History says the stock should do fine.
Even if there is an impact, the stock should recover quickly as it did earlier this year.
History says FB is likely to continue rising. An upcoming earnings report will be important but there are also short term trading opportunities with limited risk that could be sued while waiting for earnings.
Trading the Trend
When a stock is expected to move higher or pull back slightly, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
A Specific Trade for FB
For FB, a bull put spread could be opened with the July 20 put options. This trade can be opened by selling the July 20 $185 put option for about $1.10 and buying the July 20 $180 put for about $0.65.
This trade would result in a credit of $0.45, or $45 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $5 ($185 – $180). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $455 (500 – $45).
The potential gain is about 9.9% of the amount of capital risked. This trade will be open for about three weeks and the annualized rate of return provides a significant gain.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.