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Selling Short out-of-the-money (OTM) put options in META Platforms (META) stock in close expiry periods is a way to make high yields. For example, right now you can make a 1.5% yield shorting $600 strike price puts expiring in 27 days.
META stock closed at $620.35 on Friday, Dec. 13, 2024. This is up 12% since Nov. 15 ($554.40), but off from recent highs of $632.68 on Dec. 11.
It makes sense now to set a lower buy-in target price by shorting out-of-the-money (OTM) puts. This way an investor can make a 1.5% yield over the next three weeks.
Last OTM Put Play
In my last Barchart article on Nov. 19 I showed that META is worth much more: “Meta Platforms - Massive FCF Gusher - Shorting OTM Puts Works Best.”
I discussed how it could be $649 per share based on its strong free cash flow. As a result, I discussed shorting the $540 strike price put option expiring Dec. 6 for a $6.45 premium, or a 1.19% yield (i.e., $6.45/540.00). At the time, META was at $553.40, so the short play was 3.0% out-of-the-money (OTM) and had a 29% delta ratio.
As a result, the best play, along with shorting these puts, was to hold the stock long or buy a long-term call.
Now, given that META has risen, is to set a lower buy-in target price by shorting near-term expiry puts.
Shorting OTM Puts Now
For example, look at the Jan. 10, 2025, expiration period for the put option chain. It shows that the $600 strike price puts have a bid-side premium of $9.10.
This strike price is $20.35 below Friday's closing price of $620.35 - i.e., they are 3.3% out-of-the-money (OTM): -$20.35/ $620.35 = -3.28%.
Therefore, the short-put investor in this trade makes an immediate 1.52% yield (i.e., $9.10/$600.00 = 0.01517) for an investment 3.3% below the last closing price.
That is a good trade-off. The investor secures $60,000 as collateral to potentially buy 100 shares at $600 per share.
In return, they immediately receive $910 - hence the 1.5% yield over the next 27 days (i.e., $910/$60,000 = 1.517%).
Downside Risks and Issues
Moreover, note that the delta ratio is fairly low at -30%. That implies that based on past trading history there is a low chance that META will fall to $600 over the next 30 days.
But, even if that happens, all is not lost. The worst that can occur is that the investor's cash is assigned to buy 100 shares at $600 per share.
Even if META falls below $600, the investor has some downside protection. For example, the breakeven price is lower, given that the put income is already in the bank.
Here is the math: $600 - $9.10 received = $590.90 breakeven price.
This breakeven price is 4.75% below Friday's trading price close: i.e., $590.90 / $620.35 -1 = -0.04747
So the investor can withstand almost a 5% hit to the stock price with this short-put play. Moreover, given our $649 price target, this buy-in provides a good upside:
$649 / $590.90 -1 = 0.0983 = +9.8% upside
The point is that this provides a good way to set a buy-in price. Moreover, even if the short put play is assigned to buy shares the investor can also sell more OTM puts and also potentially also sell out-of-the-money (OTM) covered calls.
For example, repeating this trade over the next quarter could provide an expected return (ER), assuming the same short-put yield, of 5.0%:
(91 days /27 DTE) x 1.517% = 3.7x .01517 = .051 = 5.1% over the next 91 days
The bottom line is that META stock looks undervalued and selling short OTM put options in near-term expiry periods is a way to generate income while setting a lower buy-in target price.
