Meta Stock Analysis for Short Put Income Traders

Meta Stock

Meta Platforms (NASDAQ:META) stock appears to be ensconced within a trading range, defying the recent market upswing. This development presents an advantageous scenario for investors interested in short-term out-of-the-money (OTM) put options, offering an income avenue for current META stockholders.

As of today, META stock is holding steady at $336.00, exhibiting minimal fluctuation over the past two weeks despite broader market movements. However, a deeper analysis suggests that META stock might be undervalued, with a potential worth exceeding 30%.

The rationale behind this optimism lies in projections indicating that META stock could be valued at $1.136 trillion, assuming a 5% free cash flow (FCF) yield based on next year’s FCF estimates. With a projected 40% FCF margin, Meta is anticipated to generate $56.8 billion in FCF. Dividing this figure by 5% yields a market cap estimate of $1,136 billion, reflecting a 30.8% increase from its current valuation of $867.4 billion.

In simpler terms, META stock might reach $439.50 in the upcoming year (1.308 times $336.00). One strategic approach to capitalize on this potential growth while waiting is through short-selling OTM put options, offering shareholders a stream of income. It’s noteworthy that despite its robust free cash flow, Meta Platforms still refrains from paying dividends.

Shorting OTM Puts During Near-Term Expiration Periods

In a recent illustration, the sale of $325 strike price puts resulted in a $3.55 per contract income, translating to an immediate yield of 1.09% ($3.55/$325.00). Currently trading at $1.30, those puts have already generated a $2.25 profit for short sellers (subtracting the initial income from the current price).

With only one more week until expiration, it makes sense to await the closure of this short play without exercise. Alternatively, some investors may consider initiating another short play. Examining the expiration period ending on Jan. 5, 2024, reveals $325 strike price puts trading at $3.70 per contract on the bid side.

This implies an immediate gain of 1.138% for short sellers ($3.70/$325.00), with the strike price positioned 3.39% below the spot price—classifying it as out-of-the-money (OTM). More risk-averse investors may opt for the $320 strike price, nearly 5% below the current price. While the yield is slightly lower at 0.80% ($2.56/$320), it still offers a respectable annualized expected return (ER) when repeated every three weeks (17 times a year) at 13.60%.

Comparing the ERs, the $325 strike price provides a higher return of 19.35%, representing a 42% increase in potential annualized income (19.35%/13.60% – 1 = 42.25%). However, it’s crucial to acknowledge the heightened risk associated with the $325 strike price.

The downside risk involves META stock not rising and falling to $325.00 within the next three weeks, requiring investors to purchase more META stock at that price, potentially incurring unrealized capital losses. Nevertheless, investors can choose to wait for META stock to ascend to the target price or explore options like shorting OTM call options to augment income. Regardless, as long as META stock remains within its trading range, shorting OTM puts offers an attractive prospect for existing shareholders seeking additional income.

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