Meta Platforms has bounced nicely off the recent lows near 186. So today I want to look at an options trade in Meta stock that could benefit from neutral price action over the next month.
After a strong run in the short term, Meta stock is possibly due for a pause. Given that FB stock has acted strongly during prior bull-market runs, I can't see it pulling back too much. I'm expecting sideways action. As such, I would look at entering a butterfly trade for the April expiration period.
A butterfly is a neutral, income-oriented strategy. It is a limited-risk and limited-profit trade, but on a typical butterfly trade the profit potential runs higher than the potential loss.
Meta Stock Today: How To Build A Butterfly Spread
Butterfly spreads involve three different option strike prices, all within the same expiration date, and can be created using either calls or puts.
Construct a typical butterfly as follows:
- Buy one in-the-money call
- Sell two at-the-money calls
- Buy one out-of-the-money call
Let's take a look at how that might look on FB stock.
- Buy one April 14 200 call at 19.40
- Sell two April 14 220 calls at 6.45
- Buy one April 14 240 call at 1.30
The total cost of this trade? $780, and this counts as the maximum loss potential.
These options expire on a Thursday during the week of April 11, since April 15, or Good Friday, is a market holiday.
Reward Vs. Risk
The maximum gain is $1,220; calculate that by taking the difference in strike prices less the premium paid ($2,000 less $780).
The break-even prices are 207.80 and 232.20 (lower strike plus the premium and upper strike minus the premium).
A butterfly options trade has a tentlike shape with the potential for very large profits around the short strike. Keep in mind that it's unlikely you would ever achieve the maximum profit.
A good aim for a butterfly trade, even with Meta stock, is a 20% return on capital at risk. In this case that would be around $155.
Butterfly spreads can be a bit confusing for beginners, so it's best to paper-trade this way and see how it performs.
According to IBD Stock Checkup, Meta stock ranks No. 7 in its group and has a Composite Rating of 55, an EPS Rating of 84 and a Relative Strength Rating of 14.
FB stock currently trades above its 21-day exponential moving average, but below the 50- and 200-day moving averages.
Please remember that options are risky, and investors can lose 100% of their investment.
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 Twitter at @OptiontradinIQ.
