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Meta Platforms (META), the parent company of Facebook, WhatsApp, and Instagram, has risen significantly recently. That has pushed its put options to high levels. But, that is good for investors who short them as an income play. Moreover, META stock is too cheap here, given how strong its free cash flow is on a long-term basis.
Meta Platforms has been growing very well and is gushing large amounts of cash flow. For example, last year the company generated $43 billion in FCF. That represented almost 32% of its revenue of $134.9 billion.
As a result, META stock's outlook is very bright and has a significant upside. My price target for META stock is over 20% higher than today.
Upside in META Stock
I discussed this in a newly published article on April 8 in GuruFocus: “Meta Platforms is Still Cheap Based on Its Powerful FCF.”
You can read that article for my thesis on why I believe META stock is worth $627.24 per share this year based on projections of its powerful FCF. That represents an upside of over $107 from today's price of $520.35, or +20.6%.
Moreover, next year my price target is over $719 per share, or up 38% from today. The bottom line is that holding META stock here will likely be worthwhile for existing investors.
In addition, it also makes sense for these investors to sell short out-of-the-money (OTM) put options to gain extra income. That way they can take advantage of the company
Shorting OTM Puts for Income
I discussed this strategy in an earlier March 17 Barchart article, “Meta Platforms Put Options Have High Premiums - Ideal to Short as an Income Play.” Readers who followed that article will find that the short-put play discussed there worked out quite well.
For example, I discussed shorting the $460 and $465 strike price puts that were to expire 3 weeks later on April 5. As it turns out, META stock closed at $527.34 per share, so both of these put options (if shorted) expired worthless.
That means the investors who collected the $4.95 and $6.20 premiums, respectively, kept these high yields with no obligation to buy the stock. The put yield for the $460 strike price, which was 5% below the spot price, was 1.076% (i.e., $4.95/$460) and the $465 strike price,4% OTM, had a 1.333% yield (i.e., $6.20/$465.00).
Similar yields can be made again today. For example, look at the April 26 expiration period, 18 days from now. This shows that the $490 strike price, 6.5% below today's price, has a $11.90 bid side price. That provides a 2.42% yield to short-put investors.
Moreover, there are over 4300 contracts at this strike price, showing that there could be a good fight for META stock to not fall below these levels.
For more conservative investors, look at the $480 strike price, 8% or so out-of-the-money. The bid price is $9.10 or a 1.89% yield for the short seller at the $480 strike price. That means the breakeven price is $470.90 (i.e., $480-$9.10), or 9.72% below today's price. That provides a huge amount of downside protection along with a good yield possibility.
This also means that if the stock does fall to these strike prices, short investors in these puts will be obligated to buy the shares. They have to secure cash to buy 100 shares per put contract shorted. For example, for the $490 strike price short play, the investor has to secure $49,000 in cash and/or margin and $48,000 for the $480 strike price short-put play.
But this cash will be well spent if it is used to buy META shares. That is because we have shown that the stock is worth considerably more. The investor could then either continue to hold the stock or even sell covered calls in out-of-the-money (i.e., higher) strike prices.
The bottom line is META stock looks like a bargain here. Investors can take advantage of its high put prices by selling them short to generate more income and potentially buy more shares if the stock falls.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
