Meta Platform (META) stock has put options with elevated put option premiums. It makes sense now for existing shareholders to short them for extra income. For example, the 3 weeks out 4.44% OTM strike yields 1.0%.
Meta stock closed up 2.48% to over $500 at $502.30 on Friday, March 1. Since the company announced its Q4 results on Feb. 1, the stock has skyrocketed 27.2% from $394.78. That is what is pushing put option premiums so high.
Why META is Soaring
But investors shouldn't be so surprised. I predicted this in my Feb 9%20made%20%2440,more%20at%20%24556%20per%20share.) and Feb. 23 Barchart articles. For example, my Feb 9 article, “META Stock Could Still Be Worth Up Over 18% to $556 Per Share, Based on Its Massive FCF,%20made%20%2440,more%20at%20%24556%20per%20share.)” explains why.
Of course, the fact that Meta Platforms decided to start paying a dividend didn't hurt. However, this was possible due to the company's confidence in its free cash flow (FCF) generation and its high 32% FCF margins.
The thesis still exists and in fact, it's possible META could be worth more. For example, analysts now project sales will reach $158.44 billion in 2024. But for next year they project $178.12 billion, 12.5% higher.
So, sometime in the next 12 months (NTM), analysts will project a run rate NTM sales forecast of $168.28 billion.
Therefore, if the company continues to make a 32% FCF margin its NTM FCF may be forecast as $53.9 billion (i.e., $168.28b x 0.32). Here is how that will affect Meta stock.
Using a 3.5% FCF yield metric as we did in our last article shows that its market cap would be $1,540 billion (i.e., $53.9b/0.035). That is still 20% over today's market cap of $1.28 trillion.
In other words, META stock could still be worth 20% more, at $602.76 sometime in the next 12 months (i.e., 1.2 x $502.30 = $602.76).
This should give shareholders who already own the stock a reason to keep holding. Another way to play this is to sell short out-of-the-money (OTM) puts.
Shorting OTM Puts for Income
In my last article on Feb. 23, I discussed shorting the $465 strike price put option expiring March 15, 4.41% below the spot price, for $4.55 per contract. That provided an immediate yield of about 1% (i.e., $4.55/$465 = 0.978%).
Today, those puts are much lower at $1.17. So, this trade has been a success as the short play not only provided immediate income of 1% but the stock has risen and there is likely no obligation for the put short seller to have to buy the stock.
It makes sense to do another similar trade. Look at the March 22 expiry period, which is three weeks away from today. It shows that the 4.44% OTM put is the $480 strike price put. This trades for $4.65 per contract, even higher than the prior $4.55 premium in the March 15 trade when it was 3 weeks away. In other words, premiums have risen.
This provides an immediate income of almost 1.0% (i.e., $4.65/$480 = 0.97%). Keep in mind that an investor who already owns the stock can do this to create extra income. This works out to 3.88% every quarter (i.e., 0.97% x 4), assuming the same put yield can be achieved 4 times.
The worst that will happen is that the investor will have to buy more shares at $480 (if the stock falls to that price on or before March 22). However, I have shown that META stock could be worth over $600 per share sometime in the next 12 months. In other words, this might not be such a bad thing for existing shareholders who end up adding to their stake.
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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.
