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The Big Bet on a Facebook Face-Plant

Tuesday, 26 Mar 2013 | 4:31 PM ET
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You could say that $25 is Facebook's "level of truth"—and this trader is betting that the truth will hurt.

After initially trading higher with the broad market Tuesday morning, shares of Facebook slumped back to unchanged, and saw bearish option trading. The biggest trade of the day was the purchase of 10,000 May 25-strike puts for $1.45, which was done with the stock at $25.21. This is a bearish bet that the stock will be below $23.55, or 6.5 percent lower, at May expiration.

Facebook shares are currently down 12 percent year-to-date, and hovering at a key resistance point. The $25 level marked a breakout for Facebook back in late November, and when it was tested in December, it held as support.

(Read More: What's Behind Facebook's Slide?)

Currently this level also coincides with the stock's 200-day moving average, which adds to the importance of holding this level. Since January, Facebook has been drifting lower, and it is ready to test this area of support again. This option trader is betting that the support will not hold, which could send the stock towards its fall 2012 lows around $19.

The catalyst for either a bounce higher or drop lower could be Facebook's upcoming earnings, which are expected at the end of April. Buying puts allows you to benefit not only from a decline in a stock's price, but also from an increase in implied volatility.

(Read More: Facebook is Watching You...And Not Just on Facebook)

Right now, 30-day implied volatility in FB is about 32 percent, which is on the low side of its 52-week range. As earnings approach, implied volatility is very likely to rise, as traders buy options to position themselves for the stock's move.

If you are bearish on Facebook, then this trade could be double winner, as we could see the stock moves lower and implied volatility spike higher.

Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."

Disclosures: None

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