Meta Platforms is a highly ranked stock that has had a solid run and could be due for a pause here.
Meta stock is above upward sloping 21-, 50- and 200-day moving averages. However, after an impressive run, I'm thinking it might pause around this level.
A calendar spread is an income trade that involves selling a short-term option and buying a longer-term option with the same strike price.
Usually, this is done with monthly options, but it can also be done with weekly options.
Traders typically use call options unless the trade has a bearish bias. In that case, they would use puts.
In today's example, we'll look at a calendar spread trade on Meta stock.
Setting Up Meta Stock Spread
With Meta Platforms stock trading around 340, setting up a calendar spread at 340 gives the trade a neutral outlook.
Selling the Dec. 15 call option with a strike price of 340 will generate around $695 in premium. And buying the Jan. 19, 340 call will cost approximately $1,350.
That results in a net cost for the trade of $655 per spread, and that is the most the trade can lose.
The estimated maximum profit is $500, but that could vary depending on changes in implied volatility.
The idea with the trade is that if Meta stock remains around 340 for the next few weeks, the sold option will decay faster than the bought option. That would allowing the trade to be closed for a profit.
The break-even prices for the trade are estimated at around 329 and 354. But these can also change slightly depending on changes in implied volatility.
For this reason, calendar spreads are considered a more advanced strategy and not recommended for beginners.
Target Profit Of 30% On Meta Spread
For a trade like this, I would set a profit target of 30%, and I would set a stop loss if Meta stock breaks through either 329 or 354.
Calendar spreads are a neutral option trading strategy. Bullish traders might consider something simpler like a bull put spread, like our Nov. 21 bullish diagonal call spread on Chevron.
Meta stock is ranked No. 1 in its group. It has a Composite Rating of 99, and EPS Rating of 95 and a Relative Strength Rating of 98.
For those who followed our July 24 trade on Microsoft and the Aug. 29 trade on ServiceNow, it could be a good time to start taking profits on both.
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 Twitter at @OptiontradinIQ
