Facebook has been trading sideways for much of the past six months. But some options traders have found a way to make money no matter what the stock does.
With a few short-term exceptions, shares in the social media giant have stayed generally between $75 and $85 since the end of 2014. But some traders are using that tight range as an opportunity to profit by selling puts.
By selling puts, traders sell the right to sell a stock at a set price within a given time frame. In other words, traders receive some premium to buy a stock at the option's strike price. For that reason, some traders view selling puts as a limit order to buy the stock.
According to options expert Mike Khouw, the best strategy to use to sell puts is one that expires within a three-month period, has an attractive entry price and yields roughly 1 percent per month.
Khouw sees one Facebook option in particular as meeting all three criteria. Specifically, he finds the 77.50-strike puts expiring in June to be one that traders should consider selling. On Friday, these puts were trading at around $1.65, or roughly 2 percent of the share's trading price.
And since the puts were slightly out-of-the-money, factoring in the $1.65 premium means that the effective purchase price would be $75.85 if the stock is put to the options seller.
"That represents about a 5.5 percent discount or right near the bottom end of that [$75 to $85] range," Khouw said. "If you are looking to collect some premium in a name like Facebook over the next couple of months, July 77.50 puts might be an attractive sale."
Facebook, which went public three years ago Monday, is now trading twice its opening price. But most of those gains happened in its second year of trading. This past year, shares are up 39 percent. While impressive, it pales in comparison to the 116 percent returns the stock saw in the 12-month period between May 18, 2013, and May 18, 2014.