How to trade Facebook's first short selling day

The moment that the Facebook was set to free trade at 11am EST on Friday, it began to drag other social media stocks down with it.  Watching the flagship of the industry being battered - mostly because its IPO had been mispriced - created an overall sense of cynicism about social media companies and their unproven models. 

Now that the smoke has cleared, investors are rethinking their retreat.  While waiting for Facebook to find its true level, they're bidding up equities liked LinkedIn and GroupOn in an attempt to keep their 'social media exposure.'

Here is a quick look at the price development since the Facebook IPO started trading...

We can see two fairly distinctive patterns. The first day of trading was highlighted by Facebook dropping from $42 to $38, which caused it drag down much of the other 'social media'. RenRen, the 'Facebook of China' was the big loser, dropping more than 17%, with Yelp and Zynga also suffering large losses on that day. 

Yesterday (Tuesday) was a very different story, as the Facebook plunge resulted in a switch into the the other social media stocks as institutional investors were looking to keep their exposure to this sector.

The true test will come Thursday, once investors are allowed to short Facebook stock. One way to play this would be to short Facebook and go long on Linkedin to keep neutrality on 'social media'. I believe that many other short term traders will also be looking for the same trade to profit from Facebook's continuing selling pressure.

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