Meta Platforms is showing elevated implied volatility (IV) as the company is due to report earnings after the close Thursday. Traders who think Meta stock will not move too much following earnings could look at an iron condor trade.
With an IV percentile of 61% in Meta stock, this means the current level of implied volatility is higher than 61% of all other readings in the past twelve months.
Meta Platforms stock has stayed within the expected range following three of the last six earnings announcements. And for this earnings report, META is anticipated to stay in a 6.7% range up or down.
Meta Stock Today
So, let's look at an example of how we might set up an iron condor over earnings.
As a reminder, an iron condor combines a bull put spread options trade and a bear call spread.
The idea with the trade in Meta stock is to profit from time decay as we expect that shares in the Leaderboard stock will not move too much in either direction.
Setting Up The Trade
First, we take the bull put spread. Using the Feb. 2 expiry, we could sell the 360-strike put option and then buy the 355 put. That spread could be sold for around $0.75 per set of contracts, or $75, based on recent trading.
Then we create the bear call spread. You could place it by selling the 425 call and buying the 430 call. This spread could also be sold for around $0.65 per set of contracts, or $65.
In total, the iron condor could generate around $1.40 per contract. That totals $140 of premium.
The profit zone ranges between 358.60 and 426.40. You can calculate this by taking the short strikes (the sold put and sold call) and adding or subtracting the premium received.
As both spreads on the set of put and call option strikes are $5 wide, the maximum risk in the trade is (5 - 1.40) x 100 = $360.
The Latest In Tech Earnings And News
The Reward In Meta Stock In Options
Therefore, if we take the premium ($125) divided by the maximum risk ($375), this iron condor trade has the potential to return 39%.
If price action stabilizes, then iron condors will work well. However, if Meta stock makes a bigger-than-expected move, the trade will suffer losses.
Trades held over earnings allow little room for adjusting, so they can be a bit hit-or-miss.
According to IBD Stock Checkup, Meta stock ranks No. 1 in its group and has a perfect Composite Rating of 99, an EPS Rating of 94 and a Relative Strength Rating of 96.
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, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
