Meta Platforms Short Strangle Could Net $260 In 3 Weeks

Meta Platforms (META) is currently showing high volatility with an IV Percentile of 88% and an IV Rank of 86%.

The Barchart Technical Opinion rating is a 40% Sell with a Weakest short-term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

META rates as a Strong Buy according to 20 analysts with 2 Moderate Buy ratings, 12 Hold ratings and 1 Strong Sell rating.

Meta Platforms is the world's largest social media platform. The company's portfolio offering evolved from a single Facebook app to multiple apps like photo and video sharing app Instagram and WhatsApp messaging app owing to acquisitions. 

Along with in-house developed Messenger, these apps now form Meta's family of products used by billions of people on a monthly basis. Meta uses metrics like daily active users (DAUs) and monthly active users (MAUs) to measure Facebook's user base. 

Marketers buy ads that can appear on multiple platforms including Meta, Instagram, Messenger and third-party applications and websites. Meta, thanks to its huge user base gained a significant market share in the advertising space wherein it faces tough competition from Google, Twitter, Amazon and Snapchat-parent Snap.

Meta also faces significant competition from the likes of Apple (messaging), YouTube (advertising and video), Bytedance (social media) and Tencent (messaging and social media).

Today, we’re going to look at a short strangle trade due to the high IV percentile.

A short strangle aims to profit from a drop in implied volatility, with the stock staying within an expected range.

When implied volatility is high, the wider the expected range becomes.

The maximum profit for a short strangle is limited to the premium received while the maximum potential loss is unlimited. For this reason, the strategy is not suitable for beginners.

META SHORT STRANGLE

Traders that think META stock might remain stable over the next few weeks could look at a short strangle.

As a reminder, a short strangle is a combination of an out-of-the-money short put and an out-of-the-money short call.

The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.

First, the short put which could be placed around the 15 delta. Using the January 27 expiry to avoid earnings, the 112 put could be sold for around $1.40.

Then the short call, also placed at the 15 delta. The January 27, 145 strike call could be sold yesterday for around $1.20.

In total, the short strangle will generate around $2.60 per contract or $260 of premium.

The profit zone ranges between 109.40 and 147.60. This can be calculated by taking the short strikes and adding or subtracting the premium received.

Margin requirements may vary from broker to broker but are likely to be around $4,100.

If price action stabilizes, then short strangles will work well. However, if META stock makes a bigger than expected move, the trade will suffer losses.

Conclusion And Risk Management

One way to set a stop loss for a short strangle is based on the premium received. In this case, we received $260, so we could set a stop loss equal to the premium received, or a loss of around $260.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around 117 on the downside and 138 on the upside.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

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