Chart of the Week: Meta
This week’s chart analysis is based on a Meta play that Bob Lang shared on Market Navigator on CNBC. It’s a great example of how to use a spread trade to maximize profits.
And my thought was an idea about a trade on Meta platforms; META is the symbol for that. And where I wanted to go with it was clearly a long-trade idea. Because I looked at the chart, I looked at the opportunity there, how the stock had done prior with post-earnings in the last three to five quarters, and I saw there being a nice opportunity long.
Further, the stock had fallen sharply – you can see it on the chart over there – the stock had fallen sharply from the all-time highs just a couple of months ago – from $735 all the way down to about $480. Huge drop – 30%. But now it’s making a comeback.
And it got above that downtrend line there, and I was looking for that $630 level. And you could have seen there – that was an interim high in March. I targeted that level when I was talking about this with Market Navigator, with Don Chiu. But I also saw that on the chart, and I saw an opportunity where the stock was trading at about $548 the day before earnings came out.
So my trade idea here was, let’s take a little bit of moderate risk here, let’s take something out-of-the-money. I went with the 560 call, talked about that one.
But that was expensive – that was about $26. It will say $28 on the screen here – but it was about $26. Still a little too much for me to pay. So I wanted to lay off some of that risk. Sold the 600 call. Why the 600 call? Because that was about $52 above where the current price was, and the expected move post-earnings was $48.
So if the stock did just a little bit less than the expected move, I could capture a lot of that premium from a call out-of-the-money – far out of the money. $600 was about $52 out of the money.
And if we could – just for three days – two days, actually, because earnings came out Wednesday – I only needed two days worth of premium to worry about with expiration.
So what transpired there was looking at the 560 call against the 600 call – so I’m gonna go long the 560 for May 16, short the 600 call, which expired May 2 – for a net of about $20-21. So I effectively cut my risk by about 24-25%.
What’s the downside? If the stock tanks, I’m losing all that premium. But I’m only gonna lose $21 versus $26 if I had just gone with a straight call.
As it turns out, this was just a phenomenal trade result, because ideally we would have wanted to see the stock finish Friday, May 2, right at or near $600. It finished at $597. Absolutely perfect. Because the 600 call, which I sold for $5, disintegrated. Went to zero.
Meanwhile, now I’m long the 560 call – still – but that price has ballooned. I bought it at say, $26. It’s now worth $46. Because I’ve got two weeks of time left to go on the option from this recording. Now we’re about a week and a half away. I still have two weeks left to go, I’m deep in the money with this call option that I am long. And I have other options I could do – I could sell a call, I could leave it alone.
What I did is I left it alone. And we’ll see what happens in the next couple of weeks. I do have a mental stop in place, that if the stock closes below $590, I’m out.
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