Option Trade on Facebook ahead of the Fed

The S&P has had a quiet day so far today while over the past 2 weeks it has given up almost 100 points. We've broken below a support level of 2020 on the S&P, which was a significant near-term level. You can see from the chart below that 2020 was an overhead resistance level back in September, and then turned into a support level in October and November, almost to the exact level +/- a few points. On Friday we broke down to about 2010, and today are trading below that 2020 level, but with a little upward momentum potentially looking at a relief rally.

The Fed will be announcing their decision as to whether they will keep rates the same or move them upward with a very modest increase. This decision will be the most anticipated event for this week as we go into the holidays and 2016.

Facebook (FB) has been performing very well, and recently bounced off of its 50 DMA at $102.48, and is currently trading at $103.16. Any upward move in the market should translate into strength for Facebook which has had a solid year, and remains a tech stalwart for the foreseeable future. We are buying the January 2016 $105 Calls for $3.00 today.

This gives us 32 calendar days on this trade, and enough time to see a rally in the stock. The risks in this trade are primarily twofold. One, execution risk at FB which takes the stock lower, and two, a market meltdown from an interest rate increase. Our view on this is that while it isn't an ideal time to raise rates given the softness in commodities especially oil, it is time to signal that the US markets are healthy and able to sustain a 25 basis point increase with a defensive message about remaining vigilant about future conditions.