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Meta Platforms (META) stock has done well since its earnings release. Its out-of-the-money (OTM) put options still have high premium levels. This is ideal for short-sellers as an income play, especially for existing shareholders.
I described this trade in my Feb. 23 Barchart article, “Shorting META Puts for Income Makes Sense for Shareholders Given The High Premiums.” I recommended selling short the $465 strike price put option for expiration on March 15, which was 3 weeks away. Since META stock closed at $484.10, this put option expired worthless.
As a result, the $4.55 premium received by the short seller produced a clean 1.0% yield ($4.55/$465 = 0.978%). At the time the stock was at $486.35, so the short play was OTM by 4.39% (i.e., $465/$486.35-1). So, there was room for the stock to fall and the investor's yield would still be protected.
So, even though META ended up falling by a small amount, the short put play worked out as the investor had no obligation to buy the stock at $465.00
It makes sense to redo this trade on Monday, March 18, as OTM META put options are still high.
Shorting OTM Puts in META Stock
For example, look at the April 5, 2024, expiry period, three weeks away. It shows that the $465 puts, 4% out-of-the-money, trade for $6.20 per put, and the $460 strike price puts, 5% OTM, are at $4.95.
That means a short seller can make a 1.333% yield with the $465 puts (i.e., $6.20/$465.00). The $460 strike price put play has a 1.076% yield (i.e., $4.95/$460.00).
Here is how that works out. The investor who wants to do this trade must first secure $46,500 in cash and/or margin with their brokerage firm. Then, after receiving approval to do these types of option trades from that brokerage, they can enter an order to “Sell to Open” one put contract at $465.00 for expiration on April 5.
Then the account will immediately receive $620, assuming the bid side price stays the same on Monday, March 18. That works out to 1.333% of the $46,500 invested.
Moreover, if META stock stays above $465 in the next three weeks, the $46,500 will not be automatically used to buy 100 shares at $465.00 per share.
In addition, if this trade can be repeated every 3 weeks for a quarter, the investor can potentially make $2,480 (i.e., $620 x 4). That represents an expected return (ER) of 5.333% of the $46,500 invested in this trade.
Note that the $460 strike price put trade has a lower yield and ER, although the investment is slightly lower. The $495 made by securing $46,000 with the brokerage firm to buy 100 shares (if assigned at expiration), works out to 1.076%. Over 12 weeks, the investor can potentially make $1,980, or an ER of 4.30%.
Keep in mind that this assumes that the trade can be repeated. If, for example, META stock stays relatively flat, it's likely that its put option premiums will be less volatile and have lower premiums.
But, it looks like a good way to make money on META stock. That especially applies to existing shareholders. Remember, their only obligation here would be to buy more shares should the stock fall.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
