meta platform (meta) Stocks have put options with an increased premium. It now makes sense for existing shareholders to sell short to generate extra income. For example, after 3 weeks he is 4.44% OTM strike yield is he 1.0%.
Meta stock closed at $502.30 on Friday, March 1, up 2.48% to over $500. Since the company announced its fourth quarter results on February 1, the stock price has soared 27.2% from $394.78. That’s what makes put option premiums so high.
Why META is soaring
But investors shouldn’t be too surprised. I predicted this in his February 9th and his February 23rd Barchart articles. For example, my February 9th article on him, “Based on the huge FCF, META stock’s value could still rise more than 18% to $556 per share.‘ and explains the reason.
Of course, the fact that Meta Platforms decided to start paying a dividend didn’t hurt. However, this was possible because the company was confident in its free cash flow (FCF) generation and his high FCF margin of 32%.
This paper still exists, and in fact, META’s value may even increase. For example, analysts currently predict that sales in 2024 will reach $158.44 billion. However, for next year he predicts a 12.5% increase at $178.12 billion.
Therefore, analysts are predicting the next 12 months (NTM) run-rate NTM revenue forecast at $168.28 Billion.
Therefore, if the company continues to earn an FCF margin of 32%, NTM FCF could be projected at $53.9 billion (or $168.28 billion x 0.32). Here’s how it affects Metastock:
If we use the 3.5% FCF yield metric as we did in the previous article, we find that its market capitalization is $1.54 trillion (or $53.9 billion/0.035). This is still 20% higher than its current market cap of $1.28 trillion.
In other words, the value of META stock could increase by another 20% in the next 12 months to $602.76 (or 1.2 x $502.30 = $602.76).
This should give existing shareholders a reason to continue holding the stock. Another way to play this is to sell short out-of-the-money (OTM) puts.
Earn money by shorting OTM puts
In our previous article on February 23, we discussed shorting a put option expiring on March 15 with a $465 strike price (4.41% below the spot price) for $4.55 per contract. This gave an immediate yield of approximately 1% (or $4.55/$465 = 0.978%).
Those puts are now significantly lower at $1.17. So the trade was successful because not only did the short play generate an immediate 1% income, but the stock price rose and the short seller of the put was presumably no longer obligated to buy the stock.
It makes sense to make another similar deal. Keep an eye out for an expiration date of March 22, three weeks from today. This shows that the 4.44% OTM put is a put with a strike price of $480. This is trading at $4.65 per contract, which is even higher than the $4.55 premium it paid three weeks ago on March 15th. That means your insurance premiums have gone up.
This gives you an immediate income of almost 1.0% (i.e. $4.65/$480 = 0.97%). Note that investors who already own stocks can do this to generate additional income. Assuming the same put yield he can achieve four times, this would be 3.88% per quarter (i.e. 0.97% x 4).
The worst that could happen is that investors would have to buy more shares at $480 (if the stock price falls to that price by March 22nd). However, I have shown that META stock could be worth more than $600 per share within the next 12 months. In other words, this may not be such a bad thing for existing shareholders who end up increasing their stake.
More stock market news from Barchart
On the date of publication, Mark R. Hake, CFA, did not have (directly or indirectly) any positions in any securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
