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Meta Platforms (META) will release its Q2 results on Wednesday, July 26, after the market closes. Traders could push options premiums higher until then - which would be good for short-put and covered call options players.
In particular, the market may want to see if the company's new Threads platform has been gaining traction. This is in light of a recent WSJ report that engagement had fallen by 70%.
Expectations that it will lead to a new line of ad revenue are muted, despite early indications of advertisers' interest. However, any surprise in this regard would be positive.
Options Premiums are Still High
Meanwhile, put and calls option premiums are relatively high, despite the fact that META stock is off 7.3% from its high of $317.49 on July 19. That indicates that traders expect a post-release drop in the stock.
For example, for the period ending Aug. 4, 2023, put premiums were almost $10.00 for the $282.50 strike price (i.e., $9.98). This strike price is 4.0% below the closing price of $294.26 on Friday, July 21.
Nevertheless, call option premiums for a similar width away from the spot price are higher. That also indicates that overall option premiums are skewed to the call side. This means that on balance traders are slightly more bullish than bearish.
One way to take advantage of this situation is to short deep out-of-the-money (OTM) puts and calls ahead of the earnings release.
OTM Options Plays in META Stock
For example, traders can sell short the $310 call option strike price for Aug. 4 expiration and immediately receive $9.88 in premiums. This strike price is 5.35% over today's price.
To do this, the trader has to already buy or own 100 shares of META stock. That is known as a covered call play.
As a result, the premium received provides a yield of 3.36%. This can be seen by dividing the premium of $9.88 per call contract sold short by the spot price of $294.26.
This means that the trader enters an order to “Sell to Open” 1 call option at the $310 strike price for expiration on Aug. 4. The account, which has already spent $29,426 to buy 100 shares of META, immediately receives $988.00. Since $988/$29,426 is equal to 3.36% that shows why this is a favorable covered call yield.
The trader has room for the stock to rise over 5.35% before they “lose” out. For example, unless META stock rises over $319.88 on or before Aug. 4 (i.e., $310 strike + $9.88 premium received), the investor would not break even.
Nevertheless, even if that happens the trade gets to keep the $15.74 ($310-$294.26) or 5.35% realized gain (i.e., $310/$292.26-1) plus the $9.88 premium, or $25.26 in total. That works out to a total return of 8.71% (i.e., $25.26/$294.26), for just 2 weeks of work.
In fact, on an annualized basis, if this can be repeated, the total potential annualized return is over 126%.
Shorting OTM Puts
Similarly, traders can short OTM puts and essentially just receive income, with no potential realized gain. But at least in this type of trade, the trader's META shares can't be forced to be sold.
For example, the $282.50 strike price puts for Aug. 4 expiration trade at $9.98. That means the trader makes an immediate yield of 3.53% (i.e., $9.98/$282.50).
Moreover, the trader has less risk since they only have to risk $28,250 in cash and/or margin. That is lower than the $29,426 required to do a covered call trade at today's spot price. The brokerage firm requires just $28,250 to enter an order to “Sell to Open” 1 put contract at $282.50.
As a result, if traders could repeat this trade 26 times over a year, the annualized return is 91.78%. This is a bit lower than the covered call yield, but at that point, what does it really matter?
The bottom line here is that traders can make good income shorting out-of-the-money puts and calls. This is because the META stock option premiums are fairly high ahead of its July 26 upcoming Q2 results.
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.
