July 11, 2023
No earnings plays this week, as this was the dead week before the new season kicks off. So, I’m turning to one of the prettiest charts there is, one that was boosted by a major product announcement this week.
The stock reacted by jumping 3% on Wednesday, though it gave back half those gains by week’s end. A wider view shows that META has been on a consistently impressive run since November. The key has been consistency: the largest drawdown during this stretch was a mere 10% in February. The rally has been guided almost perfectly by the 20-day moving average, which has allowed just eight daily closes below it this year (that’s remarkable for a short-term moving average). Moreover, the 50-day moving average hasn’t been challenged since it started moving higher in late December.
We know that all rallies (and declines) end at some point. META’s will, too. But when? This trade is a bet that it won’t be within the next couple of months. The options market agrees, as out-of-the-money (OTM) calls are priced higher than equidistant OTM puts. I will note that this trade extends through META’s earnings, which are scheduled for July 26. The stock has reacted violently to earnings in recent quarters, with moves averaging 21% the day after the past six earnings reports (three higher and three lower). So, there will likely be some excitement with this trade.
Despite META’s bullish trend, I am exercising some caution with this trade. I could go the aggressive route, choosing a short put strike that is just beneath the 20-day moving average (red line) at the 280 level. That’s about 3.5% below the current stock price and provides a max return of 55-60% for a 5-point spread. But I’m choosing to add a larger cushion of safety by going down to the 260 strike, which is the site of the 50-day moving average (blue line) and 10% below META’s price. The return is about half that of the aggressive trade, but I want to play it safer. The choice of strikes is of course up to you.
If you agree that META will continue to respect its moving averages, consider the following credit spread trade that relies on the stock staying above $260 (green line) through expiration in 6 weeks:
Buy to Open the META 18 Aug 255 put (META230818P255)
Sell to Open the META 18 Aug 260 put (META230818P260) for a credit of $1.05 (selling a vertical)
This credit is $0.05 less than the mid-point price of the spread at Friday’s $290.53 close. Unless META surges sharply at the open on Monday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $103.70. This trade reduces your buying power by $500, making your net investment $396.30 per spread ($500 – $103.7). If META closes above $260 on Aug. 18, the options will expire worthless and your return on the spread would be 26% ($103.70/$396.30).
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