Meta Platforms stock put in a bearish engulfing candle yesterday, as it dropped roughly 2.5% and finished below its 21-day moving average. With the markets potentially due for a small correction, a bear call spread on Meta could make for an interesting trade.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiration.
There is clear resistance around the 740 level for Meta stock, and shares may struggle to break above that threshold over the next few weeks.
Potential Return Of 31%
A bear call spread on Meta stock with a Sept. 19 expiration that uses strike prices of 760 to 765 can be sold for around $1.20 a share. Traders selling the spread in a 100-share contract would receive $120 in option premium which is also the maximum possible gain. The maximum loss would be $380. That also represents a potential return of 31% between now and Sept. 19.
The spread achieves the maximum profit if Meta stock closes below 760 on Sept. 19, in which case the entire spread expires worthless, allowing the trader to keep the $120 option premium. Meanwhile, the maximum loss occurs if Meta closes above 765 on Sept. 19, which sees the premium seller lose $380 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance. A stop loss could be set if Meta Platforms trades above 740, or if the spread value rises from $1.20 to $2.40.
Bear call spreads can be a good way to potentially generate some income while the market consolidates recent gains. In this case, we are giving ourselves a lot of room for Meta to move and still keep the trade profitable.
Meta Stock Earnings Due After The Close
Meta Platforms is due to report earnings on Wednesday after the close, so this trade has earnings risk.
According to IBD Stock Checkup, Meta stock ranks fourth in its group. Further, it holds a Composite Rating of 94, an Earnings Per Share Rating of 96 and a Relative Strength Rating of 86 from Investor's Business Daily.
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, 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.
