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This META Option Spread Boasts a 33% Return Potential Amid AI Hype
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Facebook-parent Meta Platforms hosted its annual Connect developer conference yesterday, where CEO Mark Zuckerberg unveiled the tech giant’s plans for the metaverse in the artificial intelligence era.
The Facebook founder began his keynote speech by introducing a low-cost version of the company’s Quest 3 virtual reality headset, which is set to kickstart sales in mid-October. But he seemed more upbeat than in previous discussions, indicating a positive outlook for his vision ahead.
“We can start to see how the future of computing and the future of human connection are going to look,” Zuckerberg boasted to a large audience. He emphasized the capabilities of Quest, including a remote desktop integration with Windows 11.
Meta plans to be a leader in the AI space. Zuckerberg stated that Meta AI is on pace to be the world’s most used AI assistant by the end of 2024. Between Facebook and Instagram, the chatbot garners more than 500 million monthly active users.
To top it all off, Meta previewed their Orion Augmented Reality glasses; Zuckerberg described the prototype as “the most advanced glasses the world has ever seen.” Aimed at bridging the gap between the physical and virtual worlds, the glasses will feature holographic displays that adapt to user surroundings.
META Earnings and Stock Performance
Shares of Meta Platforms (META - Free Report) , which are currently a Zacks Rank #3 (Hold), have surged nearly 60% this year. The world’s largest social media platform, Meta has surpassed earnings estimates in each of the past seven quarters.
Image Source: StockCharts
Back in July, Meta reported second-quarter earnings of $5.16/share, representing a 9.8% surprise over the $4.70/share estimate. The company has delivered a trailing four-quarter average earnings surprise of 12.6%.
Analysts covering META stock are in agreement and have been raising earnings estimates across the board. Looking at 2024 as a whole, EPS estimates have been increased by 3.74% in the past 60 days. The Zacks Consensus Estimate now stands at $21.36/share, translating to a whopping 43.6% growth rate relative to last year. Meta continues to innovate and find ways to accelerate growth, a remarkable feat for a company of its size.
Image Source: Zacks Investment Research
Option Essentials
While there are many ways to take advantage of this bullish move, options provide us with flexibility, enabling us to tailor our strategy to the current market environment.
When done correctly, trading options provides huge profit opportunities with limited risk making options one of the most versatile investment vehicles.
Before we analyze today’s trade, let’s review some option fundamentals as a refresher. There is no need to worry about complex mathematical formulas or equations. Over the years I’ve found that the more complicated a strategy is, the less likely it is to work over the long run.
Options are standardized contracts that give the buyer the right – but not the obligation – to buy or sell the underlying stock at a fixed price, which is known as the strike price. A call option gives the buyer the right to buy a particular security, while a put option gives the buyer the right to sell the same. The investor who purchases an option, whether a put or call, is the option buyer, while the investor who sells a put or call is the seller or writer.
These contracts are valid for a specific period of time which ends on expiration day. There are weekly options, monthly options, and even LEAPS options which are longer-term options that have an expiration date of greater than one year.
Option spreads can be an extremely effective strategy. Debit spreads are implemented by purchasing a call option and selling a related call option with a higher strike price. These types of trades are limited risk trades because the short option is ‘covered’ by the option purchase.
Below we’re going to explore a call option spread strategy.
The Power of Option Spreads
Meta currently meets our criteria for initiating a bullish call option spread position. META stock is trending well and outperforming the market this year. The company is witnessing positive earnings estimate revisions, which our research has shown to be the most powerful force impacting stock prices.
The table below displays the risk/reward profile for this trade. META is trading at $564.63/share at the time of this writing. This trade involves purchasing the November 500-strike call at 77.8 points, and selling the November 520-strike call at 62.8 points for a total cost of 15 points. As option contracts represent 100 shares of the underlying security, this would represent a total cost of $1,500 per spread (orange box).
Image Source: Zacks Investment Research
The top (blue) row in the lower section shows the performance of META stock based on different percentage scenarios at expiration. The last (purple) row shows the corresponding percentage return for our debit spread trade. We can see that regardless of whether META increases in price, remains flat, or even loses 5% from our entry, our option spread trade will produce a 33.3% return.
These are types of odds I like to have in my favor when trading options.
Advantages of Spread Trading
1) The Option Sale Provides Downside Protection
The sale of a call option results in cash being credited to your brokerage account. This reduces the cost basis of the option purchase and provides downside protection in the event the price of the underlying stock declines.
2) Risk is Reduced
In the META trade just presented, the sale of the 520-strike call reduced the risk of the 500-strike purchase from $7,780 to just $1,500 per contract.
3) Allows Us to Maintain Positions During Volatile Markets
The downside protection provided by the call option sale helps us maintain our spread trade during heightened volatility. Naked option purchases may force us to sell early in order to prevent large losses.
4) Spreads Can Be Profitable If Stock Goes Up or Down
Option spreads can be profitable even if the underlying stock decreases or remains flat, providing us with an entirely new dimension of money-making opportunities.
Remember that the call option sold through this strategy profits as the price of the underlying stock declines, providing us with a cushion during market pullbacks.
Option spreads are a safe way to use the leverage inherent in options. Your risk is limited to the price paid for the spread. The call option spread strategy is an excellent way to take advantage of the bullish move in META shares.
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This META Option Spread Boasts a 33% Return Potential Amid AI Hype
Facebook-parent Meta Platforms hosted its annual Connect developer conference yesterday, where CEO Mark Zuckerberg unveiled the tech giant’s plans for the metaverse in the artificial intelligence era.
The Facebook founder began his keynote speech by introducing a low-cost version of the company’s Quest 3 virtual reality headset, which is set to kickstart sales in mid-October. But he seemed more upbeat than in previous discussions, indicating a positive outlook for his vision ahead.
“We can start to see how the future of computing and the future of human connection are going to look,” Zuckerberg boasted to a large audience. He emphasized the capabilities of Quest, including a remote desktop integration with Windows 11.
Meta plans to be a leader in the AI space. Zuckerberg stated that Meta AI is on pace to be the world’s most used AI assistant by the end of 2024. Between Facebook and Instagram, the chatbot garners more than 500 million monthly active users.
To top it all off, Meta previewed their Orion Augmented Reality glasses; Zuckerberg described the prototype as “the most advanced glasses the world has ever seen.” Aimed at bridging the gap between the physical and virtual worlds, the glasses will feature holographic displays that adapt to user surroundings.
META Earnings and Stock Performance
Shares of Meta Platforms (META - Free Report) , which are currently a Zacks Rank #3 (Hold), have surged nearly 60% this year. The world’s largest social media platform, Meta has surpassed earnings estimates in each of the past seven quarters.
Image Source: StockCharts
Back in July, Meta reported second-quarter earnings of $5.16/share, representing a 9.8% surprise over the $4.70/share estimate. The company has delivered a trailing four-quarter average earnings surprise of 12.6%.
Analysts covering META stock are in agreement and have been raising earnings estimates across the board. Looking at 2024 as a whole, EPS estimates have been increased by 3.74% in the past 60 days. The Zacks Consensus Estimate now stands at $21.36/share, translating to a whopping 43.6% growth rate relative to last year. Meta continues to innovate and find ways to accelerate growth, a remarkable feat for a company of its size.
Image Source: Zacks Investment Research
Option Essentials
While there are many ways to take advantage of this bullish move, options provide us with flexibility, enabling us to tailor our strategy to the current market environment.
When done correctly, trading options provides huge profit opportunities with limited risk making options one of the most versatile investment vehicles.
Before we analyze today’s trade, let’s review some option fundamentals as a refresher. There is no need to worry about complex mathematical formulas or equations. Over the years I’ve found that the more complicated a strategy is, the less likely it is to work over the long run.
Options are standardized contracts that give the buyer the right – but not the obligation – to buy or sell the underlying stock at a fixed price, which is known as the strike price. A call option gives the buyer the right to buy a particular security, while a put option gives the buyer the right to sell the same. The investor who purchases an option, whether a put or call, is the option buyer, while the investor who sells a put or call is the seller or writer.
These contracts are valid for a specific period of time which ends on expiration day. There are weekly options, monthly options, and even LEAPS options which are longer-term options that have an expiration date of greater than one year.
Option spreads can be an extremely effective strategy. Debit spreads are implemented by purchasing a call option and selling a related call option with a higher strike price. These types of trades are limited risk trades because the short option is ‘covered’ by the option purchase.
Below we’re going to explore a call option spread strategy.
The Power of Option Spreads
Meta currently meets our criteria for initiating a bullish call option spread position. META stock is trending well and outperforming the market this year. The company is witnessing positive earnings estimate revisions, which our research has shown to be the most powerful force impacting stock prices.
The table below displays the risk/reward profile for this trade. META is trading at $564.63/share at the time of this writing. This trade involves purchasing the November 500-strike call at 77.8 points, and selling the November 520-strike call at 62.8 points for a total cost of 15 points. As option contracts represent 100 shares of the underlying security, this would represent a total cost of $1,500 per spread (orange box).
Image Source: Zacks Investment Research
The top (blue) row in the lower section shows the performance of META stock based on different percentage scenarios at expiration. The last (purple) row shows the corresponding percentage return for our debit spread trade. We can see that regardless of whether META increases in price, remains flat, or even loses 5% from our entry, our option spread trade will produce a 33.3% return.
These are types of odds I like to have in my favor when trading options.
Advantages of Spread Trading
1) The Option Sale Provides Downside Protection
The sale of a call option results in cash being credited to your brokerage account. This reduces the cost basis of the option purchase and provides downside protection in the event the price of the underlying stock declines.
2) Risk is Reduced
In the META trade just presented, the sale of the 520-strike call reduced the risk of the 500-strike purchase from $7,780 to just $1,500 per contract.
3) Allows Us to Maintain Positions During Volatile Markets
The downside protection provided by the call option sale helps us maintain our spread trade during heightened volatility. Naked option purchases may force us to sell early in order to prevent large losses.
4) Spreads Can Be Profitable If Stock Goes Up or Down
Option spreads can be profitable even if the underlying stock decreases or remains flat, providing us with an entirely new dimension of money-making opportunities.
Remember that the call option sold through this strategy profits as the price of the underlying stock declines, providing us with a cushion during market pullbacks.
Option spreads are a safe way to use the leverage inherent in options. Your risk is limited to the price paid for the spread. The call option spread strategy is an excellent way to take advantage of the bullish move in META shares.