Uncovering the Strategy: Selling Covered Calls on Meta Platforms Inc. Uncovering the Strategy: Selling Covered Calls on Meta Platforms Inc. Uncovering the Strategy: Selling Covered Calls on Meta Platforms Inc.

Uncovering the Strategy: Selling Covered Calls on Meta Platforms Inc.

Saxo

Summary:  Meta Platforms Inc. experienced a significant drop in value after the company announced plans to aggressively increase spending on AI. The stock price plunged by 11% and closed at $441.38 last Thursday, 25th April. Investors holding Meta for long-term investment may consider selling covered call options to generate premiums while the market gyrations on the AI spending plan plays out in the short term.


meta

What is happening?

Tech investors were on edge after Meta released its Q1 earnings report with disappointing outlook on Wednesday after the markets closed. Tech sentiment rebounded slightly on Thursday when both Microsoft and Alphabet reported strong earnings. However, the fear in tech world persists as more earnings reports are coming ahead, particularly from Nvidia. 

Meta exceeded expectations with their strong first-quarter results. The company’s net profit in Q1 rose by $12.4 billion as the total revenue, mainly from advertising ads, saw a remarkable 27% increase to $36.5 billion. Investors retreated after the social media giant provided a conservative guidance for the upcoming quarter with signs of rising expenditure, which overshadowed the optimism surrounding AI.

CEO Mark Zuckerberg projected that investments in AI will bring Meta’s full year 2024 capital expenditure to be in the range of $35 to $40 billion, up from the previous range of $30 to $37 billion.  He emphasised the need for investors’ patience as the company made its move into AI.  According to Zuckerberg, “building a leading AI will be a larger undertaking than the other experiences we’ve added to our apps, and this is likely going to take several years”. However, Meta's caution about taking several years for the AI investment to yield significant returns raised concerns about the sustainability of AI spending. A similar situation occurred  in October 2022 when the company disclosed investments in the Metaverse and Virtual Reality, leading to a 25% decrease in share price.

What can you do?

For investors holding Meta for long-term investment and believe in upside potential of the stock from its AI investments, may consider selling covered call options on Meta. This strategy enables investors to earn premiums from the call options, providing additional income while they wait for Meta’s share price to reach their desired target.

Steps:

  1. With Meta’s stock price at $443.29 on 26 April 2024, selling a call option with a $480 strike price (if you are comfortable selling your Meta shares at $480) for less than 1-month expiry (25 days) will yield a total premium of $510.00 ($5.10 x 100 shares).
  2. This gives an annualized yield of 16.6% (5.10/443.29) x (360/25).
  3. If Meta’s price falls below $480 (strike price) on 24 May 2024(expiry), the option may expire worthless, and the investor keeps the premium.
  4. If Meta’s price rises above the strike price of $480, the investor is obligated to sell the share at $480, but the investor still keeps the option premium.

meta3

When comparing to options with longer maturity, you can observe how this alters the premium you receive and the distance over which you will be able to set the strike.

  • If the investor wishes to receive more premium, the investor can go for an option with a longer expiry. For the same strike at $480, the premium increases to $6.05 as the duration increases to 32 days on 31st May (annualized yield = 15.4%).
  • If the investor is only willing to sell the stock at a higher price but still want to receive a similar premium, the investor has to choose the option with a longer expiry. For a similar premium of $4.55, you can sell the option with the strike $510 and expiry in 53 days on 21st June (annualized yield = 7.0%).
  • The table below shows how the premium yield changes as we adjust the strike price and expiry date. The premium yield is subject to many factors including how close the strike is to the current price as well as market moving events surrounding Meta. 

Annualised yield of Meta options with different Strike and Expiry

meta 2

Advantages of covered calls

  • Generates passive income. Selling a covered call generates an income via premiums that can supplement the overall return of a portfolio.
  • Relatively low risk. As the risk of being short a call is covered with your stock position, this is a relatively low risk way to trade options.
  • No extra margin required to sell covered callsAs you hold the underlying stock for delivery, there is no extra margin required to sell the same number of covered calls at Saxo.

Risks of trading covered calls

  • Capping your stock’s upside potential. One key risk is the loss of opportunity to profit from your stock’s potential upside above the call option’s strike price.
  • Risk of using covered calls as a proxy for take profit orders: In the example above, it is possible that the stock trades well above $480 through the course of the option but on expiry falls back below $480. Without the option, the investor might have booked the profit at $480 but because the stock was covered by call options, the investor might have waited out until expiry.

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 Capital Markets' 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 Capital Markets' website.
This article may or may not have been enriched with the support of advanced AI technology, including OpenAI's ChatGPT and/or other similar platforms. The initial setup, research and final proofing are done by the author.

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.