Quarterly Outlook
Q3 Investor Outlook: Beyond American shores – why diversification is your strongest ally
Jacob Falkencrone
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Investing with options: Meta Platforms, Inc. earnings
Koen Hoorelbeke
Investment and Options Strategist
Summary: In the wake of Meta's upcoming Q3 earnings release, various options strategies offer intriguing avenues for investors with different market outlooks. From buying long-dated call options for bullish leverage to selling in-the-money puts for effective stock acquisition at a discount, and writing covered calls for additional income, options provide flexibility and strategic depth. Each approach comes with its own risk-reward profile, making options an invaluable tool for navigating earnings season and beyond.
Investing with options - Meta Platforms, Inc. earnings
Meta Platforms, Inc., formerly known as Facebook Inc, is expected to announce its third-quarter earnings on Wednesday, October 25th, after market hours. Analysts have projected an EPS of $3.57 and revenue of $33.43 billion. Despite facing competitive pressure and a slowing advertising revenue growth, Meta is still expected to deliver strong numbers. Regardless of the outcome, options offer versatile strategies for both bullish and bearish investors.
Strategies
1. Bullish outlook - buying call options:
Considering Meta's recent pullback, a long call option can capitalize on potential upside.
- Execution: BuyToOpen 1 20-Sep-2024 Call 250 @ $94.90 (Delta: 0.81).
- Premium: Per share: $94.90 (debit)
- Premium and risk:
- Premium cost: $94.90 x 100 (per contract) = $9,490
- Max risk: $9,490 (if Meta remains below 250 at expiry)
- Max reward: Significant (gains rise as Meta's stock price rises)
- Breakeven point: $250 (strike) + $94.90 (premium) = $344.90
- Rationale: Opting for a longer expiration minimizes the impact of time decay (or "theta decay").
- Stock vs Options Comparison: With the same amount of $9,490, you could buy approximately 30 shares of Meta at its current price of $316.30. If Meta's stock price increases by $1:
- With the stock, you would make $30 (30 shares x $1).
- With the call option, your profit would be calculated as follows: 100 (contract multiplier) x $1 (price increase) x 0.81 (Delta) = $81.
2. Bullish outlook - selling ITM put options:
Selling in-the-money (ITM) put options can be another method to acquire Meta shares at a discount.
- Execution: SellToOpen 1 27-Oct-2023 Put 327.50 @ $19.55 (Delta: -0.22).
- Premium: Per share: $19.55 (credit)
- Premium and risk:
- Premium earned: $19.55 x 100 (per contract) = $1,955
- Max risk: Significant (if Meta stock falls significantly)
- Breakeven point: $327.50 (strike) - $19.55 (premium) = $307.95
- Rationale: A shorter expiration allows for quicker premium capture, but the risk is owning the stock if it drops below the strike price.
- Stock vs Options Comparison:
- The current price of Meta is $316.30. By selling this ITM put option, you get to buy Meta at an effective price of $307.95 per share, thanks to the premium received.
- Discount in Effective Price: $(316.30 - 307.95) = $8.35 per share
- Percentage Discount: ($8.35 / $316.30) x 100 = approximately 2.64%
3. Bearish outlook - buying put options:
If you believe Meta's stock is set for a decline, a long put option can be suitable.
- Execution: BuyToOpen 1 20-Sep-2024 Put 380 @ $80.55 (Delta: -0.62).
- Premium: Per share: $80.55 (debit)
- Premium and risk:
- Premium cost: $80.55 x 100 (per contract) = $8,055
- Max risk: $8,055 (if Meta remains above 380 at expiry)
- Max reward: Significant (gains rise as Meta's stock price falls)
- Breakeven point: $380 (strike) - $80.55 (premium) = $299.45
- Rationale: A longer expiration again helps mitigate the effects of time decay.
- Stock vs Options Comparison:
- If Meta’s stock price decreases by $1:
- With the stock, you would lose $1 per share if you are holding the stock.
- With the bought put option, your profit would be: 100 x $1 x 0.62 (delta) = $62
4. Neutral/bullish outlook - writing covered calls:
If you already own Meta shares, covered calls can generate additional income.
- Execution: SellToOpen 1 03-Nov-2023 Call 350 @ $3.40 (Delta: 0.19).
- Premium: Per share: $3.40 (credit)
- Premium and risk:
- Premium earned: $3.40 x 100 (per contract) = $340
- Max risk: Limited to stock ownership
- Breakeven point: Varies based on stock cost basis
- Yield for covered call: 11-day yield: 1.07%
- Annualized yield: 35.56%
- Rationale: Writing covered calls provides income but caps upside potential. The strategy is effective if you expect the stock to trade sideways or slightly up in the short term.
- Stock vs Options Comparison:
- With the stock, you receive no income unless you sell the shares or they pay dividends.
- With a covered call, you receive immediate income and potentially have the stock called away at $350, which might or might not be beneficial depending on your outlook.
Conclusion
When it comes to investing in options around Meta's earnings, each strategy comes with its unique set of rewards and risks. The key is aligning your strategy with your market outlook and risk tolerance.
The comparisons between buying stock and using options reveal interesting facets:
- Buying calls: The leverage effect of a call option allows you to control the same amount of stock with less capital. A $1 increase in Meta's stock results in an $81 gain with a call, compared to a $30 gain by holding 30 shares of the stock.
- Selling ITM puts: This strategy could allow you to acquire Meta at a discounted rate compared to buying shares directly. The effective purchase price would be the strike minus the premium received, which can be calculated as a percentage discount against the current stock price.
- Buying puts: Options offer a leveraged way to bet against the stock with a defined risk, which can be particularly useful in volatile times.
- Writing covered calls: This strategy provides additional income and an annualized yield of 35.44%, which you can't get by just holding the stock.
Each option strategy can serve a purpose depending on your viewpoint on the stock and market conditions, making options a flexible tool for various investment goals.
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
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