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Large numbers of call options are trading today in Meta Platform (META). This highlights Meta Platform's underlying value. Institutional investors may be shorting these call options as an income play.
These call option tranches can be seen in Barchart's Unusual Stock Options Activity Report on Dec. 6. The report shows that 4,796 call options have traded at the $355 strike price for expiration on Jan. 12, 2024.
There are several interesting things about this trading activity. First, note that this volume of calls is almost 40 times the prior outstanding interest in this strike price. There were only 120 contracts outstanding before today's volume in these $355 strike price calls.
Note also this strike price is about $34.32 over today's META stock price of $320.68 per share. That represents a width of 10.7% over the spot price with just a little over a month (37 days) until expiration.
Moreover, the premium at this strike price was $1.79 on average. That seems to imply the initiating action was a short sale. This means that it is likely an existing investor(s) in META stock sold short the call premium against their shares and received the $1.79 per call contract as income.
As a result, they made an immediate yield of 0.5582% for an investment period of a little over 1 month. On an annualized basis that works out to about a 5.58% expected return (i.e., 0.5582% x 10) as there are about 10 periods of 37 days in a year.
This is likely a bullish sign for investors in META stock. Let's look at some of the reasons why.
Why Meta Platforms Stock Looks Undervalued
Why would these investors do this? Is this a bullish move on their part? Yes, that is highly likely.
One reason is the company is generating large amounts of free cash flow (FCF). If its upcoming Q4 report duplicates the great results that were reported for Q3, META could likely soar closer to the release of its Q4 earnings.
So the expiration period of Jan. 12 could be right before the company reports its earnings for 2023 and investors may push the stock up beforehand.
I discussed the company's excellent FCF performance in my Nov. 27 Barchart article, “Meta Stock Could Be 30% Undervalued…” as well as my Oct. 29 article, “Meta's Massive Free Cash Flow Could Push the Stock Well Over $400.”
The bottom line is that Meta Platforms produced a massive 40% FCF margin last quarter. That means that the $13.6 billion in FCF represented 40% of its sales of $34.1 billion.
The implication is that if Meta Platforms keeps generating this high level of FCF on growing sales, its free cash flow could soar next year. I estimate it could reach $56.8 billion in 2024. That could push META stock to a market cap of $1.136 trillion using a 5% FCF yield metric (i.e., $56.8b/0.05=$1,136 b). That is 38.9% over today's $817 million market cap .
So, it implies META stock could rise almost 39% in the coming year. That puts its target price at $445 per share or 38.9% over today's price of $320.68.
That could be one reason why investors are buying these calls in unusual volume. It could also account for covered calls since the calls are 10% over today's price with just one month until expiration.
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.
