Facebook (FB) is still in a high growth phase and therefore does not yet pay dividends to shareholders. The good news for investors is that the stock is appreciating at a market-outperforming pace. Some investors might be happy to let the stock ride over the long-term, while others may want to generate income from the investment.

The chart shows that Facebook’s stock was recently selling at an overbought level. This is evident by the stochastic oscillator which rose above the overbought level of 80 and is now breaking below that level. Now is a good time to consider extracting some income from your investment. 

For those who want to generate income from the investment there are two strategies: 

1. Sell a few shares after a run-up in price
2. Sell covered calls

Selling Some Shares

Investing in individual stocks isn’t always all or nothing. You don’t have to own the stock or not own the stock. Selling some shares after a run-up in price, while maintaining a core position, is a viable strategy to generate income at certain times. For those that bought into Facebook at a much lower price, consider selling a few shares to lock in some profits to create your own dividend payments. 

If you want a 3% dividend payment, then sell 3% of your shares. If you want a nice fat 10% dividend, then sell 10% of your shares. You can then let the remaining position ride higher and sell more shares at the next overbought level. This will allow you to lock-in some profits, while you benefit from Facebook’s above average growth. 

If the stock dips to an oversold level (below 20 on the stochastic oscillator), you can consider purchasing more shares. If Facebook’s fundamentals look strong going forward as they do right now, then accumulating more shares after a dip in price will help build back your position in the investment at a lower valuation.

Selling Covered Calls

After the recent run-up in price, Facebook’s call options have higher premium levels. Since the stock is near an overbought level, it is more likely to pullback in the near term as investors take profits. This makes the likelihood of the near term out of the money calls to expire worthless, which is what you want when selling them. 

The Q2 earnings report has come and gone and the stock responded favorably with a nice pop in response to the 59% increase in revenue and from exceeding EPS estimates by 18%. Therefore, the stock is now likely to either pause or pullback a bit. 

The tricky part of this strategy is picking the proper strike price and expiration date to sell. You want to pick an expiration date that is close enough for the call to decay to zero. At the same time, you want to pick a strike price that contains enough premium to make the trade worthwhile.   

I would only use this strategy if you are willing to have your shares called away at the strike price that you sell. Investors who have bought into the stock at a much lower price might be more willing to use this strategy. The risk is that if the stock rises to the strike price that you sell before the expiration date, the stock will be called away or sold at the strike price. The good news is that you will have locked in your profits from the investment. The bad news is that you will have to pay taxes on those profits. 

If you don’t mind risking having your shares getting called away or you were thinking of selling out of your investment entirely, then you could pick a strike price that is close to the market price. Consider selling the $125 call at the September 16 expiration date. This has about $288 in premium, which you will collect when you sell it. You keep that premium regardless of what happens. If the stock price remains below $125 by September 16, then you will have earned about 2% and you’ll still own all of your underlying shares. 

However, if the stock price rises to $125 or above, your position is likely to be called away or automatically sold at $125. If you bought the underlying stock at a much lower price, you will lock in your profits.

If you want less risk of having your position called away, then consider picking a higher strike price. The $130 strike price at the September 16 expiration has about $118 of premium remaining. If the stock remains below $130 by September 16, you will keep the premium, which would equate to about a 1% gain on your investment. You could do that multiple times per year to extract more income from your investment and have it equal to a 3% or 4% dividend for the year. 

Conclusion

Overall, I think that Facebook has many years of strong growth left. Therefore, I don’t think that the company will pay a dividend any time soon.  Facebook is more likely to continue investing its cash back into the business. Investors who own the stock can consider implementing these strategies to generate some income from their investment. Understand the risks and implement the strategy that you are the most comfortable with.