Investing with options: Meta Platforms, Inc. earnings

Strategies

• Execution: BuyToOpen 1 20-Sep-2024 Call 250 @ $94.90 (Delta: 0.81).
• Premium: Per share: $94.90 (debit)
• Premium and risk:
  • Premium cost: $94.90 x 100 (per contract) = $9,490
  • Max risk: $9,490 (if Meta remains below 250 at expiry)
  • Max reward: Significant (gains rise as Meta's stock price rises)
• Breakeven point: $250 (strike) + $94.90 (premium) = $344.90
• Rationale: Opting for a longer expiration minimizes the impact of time decay (or "theta decay").
• Stock vs Options Comparison: With the same amount of $9,490, you could buy approximately 30 shares of Meta at its current price of $316.30. If Meta's stock price increases by $1:
  • With the stock, you would make $30 (30 shares x $1).
  • With the call option, your profit would be calculated as follows: 100 (contract multiplier) x $1 (price increase) x 0.81 (Delta) = $81.

2. Bullish outlook - selling ITM put options:

• Execution: SellToOpen 1 27-Oct-2023 Put 327.50 @ $19.55 (Delta: -0.22).
• Premium: Per share: $19.55 (credit)
• Premium and risk:
  • Premium earned: $19.55 x 100 (per contract) = $1,955
  • Max risk: Significant (if Meta stock falls significantly)
• Breakeven point: $327.50 (strike) - $19.55 (premium) = $307.95
• Rationale: A shorter expiration allows for quicker premium capture, but the risk is owning the stock if it drops below the strike price.
• Stock vs Options Comparison:
  • The current price of Meta is $316.30. By selling this ITM put option, you get to buy Meta at an effective price of $307.95 per share, thanks to the premium received.
  • Discount in Effective Price: $(316.30 - 307.95) = $8.35 per share
  • Percentage Discount: ($8.35 / $316.30) x 100 = approximately 2.64%

3. Bearish outlook - buying put options:

• Execution: BuyToOpen 1 20-Sep-2024 Put 380 @ $80.55 (Delta: -0.62).
• Premium: Per share: $80.55 (debit)
• Premium and risk:
  • Premium cost: $80.55 x 100 (per contract) = $8,055
  • Max risk: $8,055 (if Meta remains above 380 at expiry)
  • Max reward: Significant (gains rise as Meta's stock price falls)
• Breakeven point: $380 (strike) - $80.55 (premium) = $299.45
• Rationale: A longer expiration again helps mitigate the effects of time decay.
• Stock vs Options Comparison:
  • If Meta’s stock price decreases by $1:
  • With the stock, you would lose $1 per share if you are holding the stock.
  • With the bought put option, your profit would be: 100 x $1 x 0.62 (delta) = $62

4. Neutral/bullish outlook - writing covered calls:

• Execution: SellToOpen 1 03-Nov-2023 Call 350 @ $3.40 (Delta: 0.19).
• Premium: Per share: $3.40 (credit)
• Premium and risk:
  • Premium earned: $3.40 x 100 (per contract) = $340
  • Max risk: Limited to stock ownership
• Breakeven point: Varies based on stock cost basis
• Yield for covered call: 11-day yield: 1.07%
  • Annualized yield: 35.56%
• Rationale: Writing covered calls provides income but caps upside potential. The strategy is effective if you expect the stock to trade sideways or slightly up in the short term.
• Stock vs Options Comparison:
  • With the stock, you receive no income unless you sell the shares or they pay dividends.
  • With a covered call, you receive immediate income and potentially have the stock called away at $350, which might or might not be beneficial depending on your outlook.

Conclusion

• Buying calls: The leverage effect of a call option allows you to control the same amount of stock with less capital. A $1 increase in Meta's stock results in an $81 gain with a call, compared to a $30 gain by holding 30 shares of the stock.
• Selling ITM puts: This strategy could allow you to acquire Meta at a discounted rate compared to buying shares directly. The effective purchase price would be the strike minus the premium received, which can be calculated as a percentage discount against the current stock price.
• Buying puts: Options offer a leveraged way to bet against the stock with a defined risk, which can be particularly useful in volatile times.
• Writing covered calls: This strategy provides additional income and an annualized yield of 35.44%, which you can't get by just holding the stock.

Related articles:

• From zero to hero - buying options
• From zero to hero - selling options