Why One Big Trader Is Fading the Facebook Bounce
President, Stutland Equities
The following post is a Guest Blog by CNBC Contributor Brian Stutland.
On Friday, Facebook shares closed 2.5 percent higher to finish November 48 percent off the month's lows. The buzz around town is that Facebook will add a "want" button, and try to go after the pay-per-click business that Google has been so successful in capturing.
However, one option trader took advantage of this strength by making a bearish bet.
Specifically, the trader bought 10,146 weekly 28-strike puts for $0.60 each. This trade will profit if Facebook is below $27.40 at the close on Friday, which would mean a 2 percent move to the downside.
(Read More: Could Facebook's Beaten Up Stock Finally Be a 'Buy'?)
Back in July, the $28 level provided support for Facebook, before the stock gapped down through it after reporting earnings. Prior support typically becomes future resistance, and that is what this trader is betting on.
After major rallies like the ones Facebook has recently seen, stocks typically need time to consolidate and catch their breath, because buyers become unwilling to continue chasing the stock upwards, and sellers want to lock in profits.
(Read More: Where Facebook Is Looking to Grow: COO Sheryl Sandberg.)
This trade is a speculative bet that Facebook is overbought and will bounce off of resistance at $28.
If Facebook is able to close above $28 this week, it is likely to remain above that important level. However, if the stock tests that level and finds sellers, the stock could trade down to $26.50, which is the 23.6 percent Fibonacci retracement from November's low, and a prior level of resistance.
Brian Stutland is the President of Stutland Equities and a contributor to CNBC's "Options Action."
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