How to Use Options to Cash In on Facebook's Coming Rally

NEW YORK (TheStreet) -- Facebook (FB) has become a major force in our world.

Much like Google (GOOGL) before it, Facebook matured rather quickly into both a cultural phenomenon and a quality corporation.

To ignore this is to ignore reality, something no wise trader or investor would do. It's better to embrace things as they are than to fight reality.

On a fundamental basis, Facebook now has a staggering market cap of more than $226 billion. The company has no debt and more than $12 billion in net cash (nearing $4.50 a share). It trades at a price-to-earnings ratio of 30, based on estimates of 2016 earnings. That is justified by the company's sales growth rate of 35%.

Jim Cramer's charitable trust Action Alerts PLUS owns Facebook and says the stock can go higher. Read his analysis here.

Facebook is a young company and has a very good future ahead of it for both users and its shareholders. Please note that 70% of Facebook's outstanding shares are held by institutional investors.

Technically FB has one-year stochastics and RSI that for the most part mirror the major stock market averages' chart patterns.

Thus, FB, as I read its chart, is noncommittal relative to an up or down in price bias. Yet, as I read things, when push comes to shove, the pattern remains bullish.

And like many stocks now, FB is becoming coiled.

Source: Yahoo Finance

The last and only time that FB coiled was early July 2013. Facebook's price was in the mid-$20s at that time. By October 2013, the stock had rocketed into the $50s!

This coil that is now forming has caught my eye, and today's trade is based on the 2013 price move.

Trades: Buy to open FB Sep 85 calls for $2.80 and sell to open FB Sep 90 calls at $1.45.

The total risk for the trade is $1.35 per spread. The suggested target to close for a gain is a bid of $1.75, and the suggested target to stop out is a bid of $0.95.

As always, this is a guideline, and you should always stick to your trading plan and what's best for your risk/reward tolerance.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits

Skip Raschke writes regularly for Options Profits. You can get his trades first and interact with him there with a free trial.

At the time of publication, Skip Raschke held no positions in the stocks or issues mentioned.

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