Buying a publicly traded security in the open market is one of the easiest ways to invest. However, the returns can be rather modest, especially for technology titans like Meta Platforms (NASDAQ:META). One popular solution is to consider the options market. Though entering the derivatives arena presents higher risks, the rewards can be quite tempting.
Much of the allure of options centers on leverage. Right now, META stock is one of the few assets that carry a market capitalization of over $1 trillion (in this case, $1.72 trillion). Subsequently, the projected returns are likely to be relatively small. For example, while Wall Street analysts rate META as a Strong Buy, the consensus price target is only $699.81, a mere 2.48% higher.
Typically, the Street issues 12-month price targets. Until more experts reassess their ratings, the projected upside is quite modest. The beauty of options, then, is that certain strategies can convert these incremental gains into robust payouts.
To be sure, META stock is “expensive” in the sense that it’s trading at just under $683. Since each options contract represents 100 shares, the premium one would have to pay — particularly for an in-the-money (ITM) option — can be quite steep. That’s one of the reasons why simple multi-leg strategies, such as the bull call spread, have become popular with the retail crowd.
With a bull spread, a trader buys a call and simultaneously sells a call at a higher strike price (for the same expiration date). The proceeds from selling the call partially offset the debit paid for the long call, resulting in a “discounted” net debit paid. Should the security in question rise through the short strike (higher) price at expiration, the trader collects the maximum payout.
Partial payouts are also available if the target security rises above the breakeven threshold. This capped-risk, capped-reward strategy is powerful when you anticipate upside of a certain magnitude. Sure enough, that may be what’s on tap for META stock.
In the last two months, META stock printed a 7-3-U market breadth sequence: seven up weeks, three down weeks, with a net positive trajectory across the 10-week period. This sequence has materialized 103 times over the past decade. In 58.25% of cases, the following week’s price action results in upside, with a median return of 2.59%.
On Friday, META stock closed at $682.87. If the implications of the 7-3-U sequence pan out as projected, META could hit around $700.56 in short order, perhaps in a week or two. Should the bulls maintain control of the market, the security could easily exceed $707, possibly within two or three weeks.
What makes this setup attractive is the implied shift in sentient regime. As a baseline, the chance that a long position in META stock will be profitable over any given week is 55.49%. Therefore, bullish traders will receive almost 3 percentage points of odds in their favor. It’s a small advantage, sure, but it’s one that the market really isn’t paying attention to.
With the above intel, data-driven speculators may consider the 700/705 bull call spread expiring July 11. This transaction requires a net debit of $230, with a maximum reward of $270, or a payout of over 117%. The breakeven point is $702.30, which explains the payout and the relatively low net debit required. Statistically, though, this trade could be surprisingly rational.
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