If you're not a Facebook insider, an early angel investor, or a qualified millionaire who has been accumulating stock before the IPO on the secondary market - you might feel that you can't really benefit from the initial public offering of the social media giant Facebook. But now - online - investors can buy binary options on Facebook, even before the IPO makes the stock available to everyone. But just because this trading vehicle exists, does this mean you should buy it?
Buying Facebook Stock?: Should You Trade Facebook Binary Options
As many personal investors wait for the long-anticipated IPO, and the opportunities to buy the stock on the secondary market have ended - there are now binary options.
What is a Binary Option?
How does this work for the Facebook IPO?
A binary option, like other underlying options on a stock or index, is a derivative. This means that the option (a call or a put) has its value (and success) "derived" from the value of another trading vehicle -- in this case the Facebook stock (that does not have a trading price yet). Since options can be generally conservative or aggressive, it's clear that BINARY OPTIONS are very speculative and are at the most risky end of the spectrum. Unlike a standard call or put option that can be sold back to the market at any time before expiration -- often at a lower value, of course -- most binary options are meant to be held to 'expiration', without any changes.
The term binary in the option name refers to the concept of ONE or ZERO, meaning that the options are intended to reach payout with a specific goal in mind, and without achieving that goal, target, or strike price -- these options often expire worthless.
FACEBOOK BINARY OPTIONS
The binary options available for Facebook online are intended to not predict price targets for the underlying stock, but instead evaluate the market capitalization at the end of the first trading day (as long as that happens in 2012 -- but at this point MAY 18th looks like the day Facebook will go public with its IPO.) Since the valuation of this social media giant has been in question for the last few years, the binary options provide investors with a trading range of market caps to choose CALLS or PUTS.
The first range is for the Facebook market value to be above $125B USD at the end of the first trading day. If you agree with this assessment you can buy CALLS ($25 USD each, up to $1000 USD) that report a payout ratio of 70% if you are correct. For those questioning Facebook's valuation, and who assume that the hype on their first trading day on the Nasdaq will be more measured you can buy PUTS ($25 USD each, up to $1000 USD), if you believe that the market value will be below $108B USD.
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Risks of Binary Options on Facebook
So if you're very bullish on Facebook, or you at least believe that the IPO will be a huge success, why not take a chance "investing" or trading these binary options? Instead of all or nothing the Facebook binary options offered by ANYOPTION seem to at least return 15% of your initial trading capital if you're wrong, but that's still an 85% loss.
WHAT ARE THE REAL RISKS OF FACEBOOK OPTIONS?
The binary options firms know that the range between $108B and $125B market cap could be the entire IPO. Some would say the company is not even worth the assumed $100B valuation, and according to a recent Forbes article, Facebook might not even be entitled to a $75B market cap. That's measured rational thinking, analysis, and opinions now...
But what happens at the Facebook IPO, when all the individual investors who have waited for Facebook stock for months (and years!) decide they must buy it before it runs away. All of the early investors who think that this is their chance to buy Google or Apple on opening day and pay for their retirement, their kids education, or at least a nice vacation. Will those traders, investors, and others BID UP Facebook stock so high on opening day that these binary options will reach these targets ($125B, $133B, $138B, $144B, $152B, $159B) and deliver double and triple digit payouts?
Should You Buy Facebook Stock or Binary Options at All?
If you can, perhaps avoid the IPO all together
For most retail investors and traders, who should remember to only trade or invest money that they can afford to lose binary options hold too much risk of speculation and catastrophic loss.
If you buy the max ($1000 USD or foreign equivalent) of each target level of these options, it would cost $11K, and it's still possible for Facebook to stay entirely in the range of $108B - $125B on opening day -- which would mean losing all but $1650. Ouch! Even the first CALL and first PUT maxed out would mean spending $2K which is likely better spent on the stock -- even if you think it's overvalued. Why? Because long after IPO day you would still own Facebook shares (ticker symbol: FB) rather than the quick loss or gain on the binary options.
For those more patient, traditional options - which likely won't trade on Facebook for quite a while - would be a better choice, even for stock investors. If the stock stays volatile for a while, it would be better to accumulate some funds in your trading account and sell cash-secured-puts (CSPs) on Facebook, essentially getting paid to buy the stock at a given strike price. And since many insiders can't sell until after the 180-day lock-up, retail investors can expect selling pressure -- and likely better entry prices -- at that time. Why not sell Facebook cash secured puts at that time if you really want to own the stock? That way maybe you can avoid the IPO all together, and get your Facebook stock later when the hype cools down.
Should You Buy Facebook Stock
Buy Facebook Stock
The site SHOULDIBUYFACEBOOKIPO.COM helps individual investors with their personal research into this long-awaited initial public offering of Facebook stock.
Conservative Options Strategies
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