When looking for bearish option trade candidates, Meta Platforms is one stock that might fit the bill. FB stock closed on the low of the day on Friday and is near a support level around 300.
If that level breaks, the stock could see further downside, and the stock traded below 300 Monday morning. Assume traders have a price target of 250 for Facebook stock; they could look at a bearish calendar at that strike price.
A bearish calendar is negative delta and positive vega, so can do quite well when the stock drops.
A calendar spread is a trade that involves selling a short-term option and buying a longer-term option with the same strike price.
Traders typically use call options unless the trade has a bearish bias, in which case they would use puts.
Let's take a look at an example of a bearish calendar spread on FB stock.
Based on Friday's closing prices, traders could see the March 250 strike put for around $4.20, then buy the May 250 strike put for around $9.
That results in a net cost for the trade of $480 per spread, and that is the most the trade can lose.
If Meta Platforms Hits Target, Trade Grows In Value
If the market bounces Monday, traders might be able to buy the calendar spread for less, let's say $400.
The estimated maximum profit is $1,400, but that could vary depending on changes in implied volatility.
The idea with the trade is that if Meta Platforms trades down around 250 in the next few weeks, the calendar spread will increase in value, allowing the trade to be closed for a profit.
With the market in backward motion, we are able to sell the shorter-dated put with higher implied volatility than longer-dated put. Normally, that's the other way around.
FB stock is ranked No. 4 in its group and has a Composite Rating of 80, an EPS Rating of 95 and a Relative Strength Rating of 49.
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 Twitter at @OptiontradinIQ
