Meta Platforms has been unstoppable lately as its retaken its all-time highs from 2021. With earnings due on Feb. 1 after the closing bell, the options market offers a way to participate in a Meta stock move with less capital at risk.
Today we'll look at how to do that using a bullish diagonal spread with an attractive reward-to-risk ratio.
Setting Up A Bullish Option On Meta Stock
A bullish diagonal spread is a trade that involves buying a call option and selling a shorter-term call option against it.
In the case of Meta stock, we can buy the Feb. 9 call at 390 for a cost around $1,310. At the same time, we can offset part of that cost by selling the Feb. 2 call with a 397.50 strike. That call option generated around $910 in premium.
The result is a net cost for the trade of $400 per spread, which is also the most the trade can lose.
What does Meta stock need to do for the trade to be successful? If it can gain a few percentage points by Feb. 2, trading around the 397.50 strike, the diagonal spread achieves a max profit around $1,200. The actual amount will vary depending on changes to implied volatility, but still, it's a nice reward-to-risk ratio.
Goal Of The Trade
The idea with the trade is that if Meta stock trades up to around 395-400, the diagonal spread increase in value, resulting in a net profit.
A bullish diagonal spread is a good way to gain some upside exposure on a stock without risking too much if the move doesn't eventuate.
The combined position has a net delta of 9, which means the trade is roughly equivalent to owning 9 shares of Meta stock. Of course, this will change as the trade progresses.
A suggested stop loss level is a close below 360, a little bit lower than its 21-day moving average line and an area of support from Jan. 17.
Before earnings, stocks exhibit a high level of volatility skew and this trade takes advantage of that. Your achieving that by selling the short-term, high volatility calls and buying the lower volatility calls.
According to the IBD Stock Checkup, Meta stock is ranked No. 11 in its industry group. It has a Composite Rating of 99, an EPS Rating of 95 and a Relative Strength Rating of 96.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
