Data privacy and security are still in the news, even four months after social media giant Facebook Inc.'s (Nasdaq: FB) issues with political analytics firm Cambridge Analytica Ltd. Apparently, data on 87 million of Facebook's users was released for cash.
So much for trust.
While Facebook stock since recovered, we learned the company admitted to giving dozens of companies special access to user data, even after telling Congress it wouldn't.
And the negative revelations continued. For example, an article from The Wall Street Journal in June reported Facebook struck customized data-sharing deals that gave select companies, such as Nissan Motor Co. Ltd., access to user records for their apps.
The company and CEO Mark Zuckerberg basically were caught in lies.
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Of course, they said the deals were to help those third parties build products to better serve their joint customers. It's always something with the big shots, isn't it? Who cares about user privacy?
Yet the Facebook stock price hit fresh all-time highs this week, at $204.50. So far, investors seem to be shrugging off the news.
But think about this.
Facebook's golden goose is its billions of faithful users. As of the first quarter of 2018, Facebook had 2.19 billion monthly active users, according to data analytics firm Statista.
That is a lot of people who expect Facebook will handle their private data responsibly. If only a fraction of them decided that their privacy was more important than posting photos of what they ate for dinner, then Facebook's advertising model would disintegrate.
Making it worse, Congress may step up their investigations, especially as members face reelection issues this fall. And the Federal Trade Commission could pursue Facebook for fines that technically could be in the billions of dollars
Now, if you own Facebook stock, it's a good time to tighten up your trailing stops to ensure you still profit from your initial investment. That's the bare minimum you should do.
But if you want to take full control of your money, then Money Morning Capital Wave Strategist Shah Gilani has a perfect way to profit quickly from the stock.
How to Profit from Facebook Stock and the Company's Transgressions
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Sophisticated traders might look at all of this overhanging bad news and speculate the stock's days at its current lofty levels are numbered. One way they might play a pending fall from grace is by shorting the stock. This is a common method to profit from falling stock prices instead of rising stock prices.
Technically, the trader instructs his or her broker to borrow shares from another holder in order to sell them in the open market. If the price of the stock goes down, the trader buys them back and returns them to their original owner, banking the profit.
Basically, it's buy low, sell high in reverse. Sell high and then buy them back low.
But it is a risky trade. If the stock does move higher in price, the trader may be forced to buy them back at a loss. And the potential loss is unlimited.
That's why Gilani recommends a lower-risk way to profit from a drop in Facebook's stock price. He recommends buying put options on the stock.
Put options give the holder the right, but not the obligation, to sell a stock at a specific price by a specific date. The risk is limited to the price paid for the options, which is much less than the price of the stock itself.
He recommends the FB Dec. 21, 2018 $150 Puts (FB181221P00150000), which cost approximately $1.40. Since each option gives you the right to sell 100 shares, the total cost before commissions would be $140 for one put option.
With Facebook stock trading near $201 per share, these options are considered to be "deep out of the money." That means the strike price – or contracted selling price of the stock – is well below the current price of the stock. It's a long way to fall.
That is not a problem because the option will increase in value as the stock price falls. The point is to profit from a short-term decline and sell the option well before it expires in December.
Therefore, if the stock drops just a few percent, the option could easily double or triple in value. That's not a bad deal at all.
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