Meta Platforms stock received two upgrades on Monday with analysts from Stifel and Goldman Sachs both raising their price targets on Meta stock.
There is also some volatility skew due to earnings later this month with short-term options showing higher implied volatility than long-term options.
One way to take advantage of this skew is via a diagonal put spread.
Going Diagonal On Meta Stock
This option strategy is an advanced strategy because it utilizes options over different expiration periods and different strike prices.
Here's a setup to use for Meta stock.
Traders could sell a Nov. 15 put with a strike price of 535 and buy a Dec. 20 put with a strike price of 520.
Those strikes trade around 11.30 for the Nov. 15 put and 12 for the Dec. 20 put. The spread trade results in a net debit of around 70 cents. That puts very little risk on the upside.
The worst that can happen if the stock rises above 655 is that the puts expire worthless and the trader loses the 70 cents in premium paid, or $70 for a block of 100.
The larger risk is on the downside. That has a potential maximum loss of $1,570. This is calculated by taking the difference in the spread (15) multiplied by 100 and adding the premium paid (70). That maximum loss could happen if META stock traded around $420 at the expiration of the short put. So there is certainly room to cut the loss earlier.
The maximum potential gain is around $1,700 which would occur if Meta closes right at 535 on Nov. 15.
The break-even price is estimated at around 502 on the downside and 655 on the upside. The trade will do well if Meta stock stays above 535 for the next week or so.
Managing Risk
Aiming for a return of around 10%-15% makes sense and I would set a similar stop loss.
The worst-case scenario is a sharp drop in Meta stock early in the trade. For this reason, if the stock drops below 535 in the next few weeks, I would consider closing the trade early to minimize losses.
The initial trade setup has a delta of 2, meaning the position is roughly equivalent to owning two shares of META stock. Note that this delta number can change significantly as the stock starts to move.
One of the advantages of the trade is that the put we are selling has higher volatility (46%) than the put we are buying (38%). Just like with some stock strategies, when it comes to volatility, we want to buy low and sell high.
Closing before the earnings date of Oct. 30 is a good idea to avoid earnings risk.
According to IBD Stock Checkup, Meta stock ranks No. 1 in its industry group. It has a Composite Rating of 97, an EPS Rating of 96 and a Relative Strength Rating of 93.
It's important to 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
