Meta Platforms currently has the not-so-enviable title of this year's worst-performing stock on the S&P 500 — down over 73% year to date. And the company's prospects are worsening.
Last week's earnings missed expectations with an EPS of $1.64, well short of analyst estimates of $1.90. The company guided toward declining ad revenue with greater competition from the likes of TikTok, Apple and Alphabet.
Perhaps most shocking was the continued cash burn of Meta Reality Labs, which has lost $9.4 billion this year alone. The company warned of deepening losses in that segment in 2023.
The metaverse gamble is peculiar, particularly as the majority of tech companies are cutting back spending amid higher interest rates. With many critics already claiming Zuckerberg's metaverse project is a bust, the company may need a reality check.
This is how options traders can bet on further weakness in Meta stock by using a bear put spread.
Constructing Bear Put Spread On Meta Stock
To construct a bear put spread, simultaneously buy a put and sell a put at a lower strike price with the same expiration. For Meta stock, investors can consider buying a 90-strike put while selling an 80 put, both with a Dec. 16 expiration.
To place the trade, investors will pay a debit of about $3.50 a share. This coincides with a maximum loss of $350 should Meta trade above 90 on expiration. The maximum gain is the width of the strikes minus the debit paid. In this case, a maximum gain of (10-3.5 x 100 = $650) will be realized if Meta trades below 80 on expiration.
With a delta of -24, this bear put spread is on inception equivalent to shorting 24 shares of Meta. Unlike shorting shares, a bear put spread has capped risk.
Whenever a stock has fallen off as much as Meta there is a risk of a sharp reversal. This makes a bear put spread especially attractive for investors who expect further weakness though are weary of shorting shares due to the risk of a sudden rebound.
Meta stock currently has an IBD Composite Rating of just 20, of 99, with shares trading well below the 50-day and 200-day moving averages. Shares are now at lows last seen in 2015.
