After Getting Cut in Half, An Options Trader Thinks this Social Media Giant May Have Bottomed

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Social-media giant Meta Platforms has gotten cut in half, and now one big investor seems to think it will stabilize.

Check out the unusual options activity detected in the company formerly known as Facebook (FB) yesterday:

  • A trader sold 16,500 8-April 200 puts for $8.65.
  • At the same second, he or she also sold 16,500 8-April 200 calls for $8.40.
  • Volume was more than more than 50 times open interest at both strikes, which suggests new positions were opened.

Calls set the level where investors can buy a security, so they can gain value when shares rise. Puts fix the selling price, to they can appreciate to the downside. In both cases, traders buying option contracts are looking for prices to move.

Selling is just the opposite: Investors accept a credit now, looking for the stock not to move significantly. They collect a premium and hope for the calls and puts to expire worthless.

Short Straddle

Wednesday’s trade was known as a short straddle because the trader sold calls and puts at the same strike price. He or she is expressing a view that prices will remain little changed over the next three weeks. (The trade has potentially significant risks if the stock moves a lot.)

Meta Platforms (FB), daily chart, showing key events and rising implied volatility.

They collected $17.05 in premium, which is the amount FB can move in either direction before the strategy loses money. That implies a range between $182.95 and $217.05.

To put that in perspective, FB hasn’t seen the lower price since April 2020 as it rebounded from the initial coronavirus selloff. It hasn’t traded at the higher price in about a month.

FB rose 6 percent to $203.63 yesterday. It peaked above $384 in September and then skidded lower as changes to Apple’s (AAPL) iOS privacy rules hurt its advertising model. A broader shift away from growth stocks and declining user traffic also took a toll.

Selling Volatility

Thursday’s short straddle seems to have two other rationales. First, options tend to lose value quickly in the last three weeks before expiration because of time decay. These 8-April contracts are in that phase.

Second, implied volatility often increases when a stock is falling and sentiment is bearish. (Notice how the blue line on the chart has increased from about 28 percent in January to almost 50 earlier this month.) Selling calls and puts in a strategy like a short straddle can potentially capitalize on that higher implied volatility.

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