Meta Platforms stock is below its 50-day moving average but is holding above a support level of 700.
The artificial intelligence industry heavyweight and Facebook parent is due to report earnings after the closing bell on Oct. 29. Volatility skew is high due to Meta's pending earnings report, with short-term options showing higher implied volatility than long-term options. One way to take advantage of this skew is with a diagonal put spread.
This option strategy is an advanced strategy because it utilizes options over different expiration periods and different strike prices. We looked at a similar idea last week on Netflix, which worked out well. This cash secured put trade on Hims & Hers Health stock is also working well so far.
Setting Up Meta Options Trade
For Meta, here's an example:
Traders could sell an Oct. 31 put with a strike price of 640 and buy a Nov. 7 put with a strike price of 635.
As of Wednesday's close, the Oct. 31 put could be sold for around 7.15 and the Nov. 7 put could be bought for 8.05. The trade would result in a net debit of around 90 cents per share, which means there is very little risk on the upside. The worst thing that can happen is the puts expire worthless and the trader loses the 90 cents in premium paid.
Meanwhile, the risk on the trade is on the downside with a potential maximum loss of 1,090. This is calculated by taking the difference in the spread (10) multiplied by 100 and adding the premium paid (90).
The maximum potential gain is estimated at around 3,200, which would occur if Meta Platforms closes right at 640 on Oct. 31. However, this figure will varying depending on changes in implied volatility.
The breakeven prices are estimated at around 600 and 720. The trade will do well if Meta Platforms stock stays around 690-740 for the next week or so. Aiming for a return of around 10%-15% makes sense and setting up a similar stop loss is ideal.
Risks And Advantage
The worst-case scenario is a sharp drop in Meta Platforms stock early in the trade. For this reason, if the stock drops below 640 in the next week, I would also consider closing the trade early to minimize losses.
The initial trade setup has a delta of -1 meaning the position is close to directionally neutral. Note that the delta number can change significantly as the stock starts to move.
One of the advantages of the trade is that the put we are selling has higher volatility (57%) than the put we are buying (52%). Just like stocks, when it comes to volatility, we want to buy low and sell high.
Closing before the earnings date on Oct. 29 is a good idea to avoid earnings risk.
Investor's Business Daily gives Meta Platforms stock a Composite Rating of 95 out of a best-possible 99, an Earnings Per Share Rating of 96 and a Relative Strength Rating of 76. According to IBD Stock Checkup, Meta Platforms ranks seventh in its group.
It's important to 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 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, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
