Here’s how we are trading $META – July 27, 2023
Dan Fitzpatrick at StockMarketMentor.com, I want to look at Meta ( NASDAQ: META ) today.
The company reported pretty strong earnings and surprised the hell out of Wall Street. The stock gapped up a lot. It opened at 325.00, yesterday’s close was at 298.00, so it was an 8-9 percent gap up, premarket it was up even higher. And so this is a stock that I think, ultimately, the trend is higher.
There is nothing wrong with this. How can you look at this and say, It looks “toppy” to me? It’s not, but it does need to settle in a little bit. I want to explain to you what we did at Option Market Mentor. Yesterday, I put on what I call an iron condor volatility crush trade. Where the idea is, the cost of options, as you go into an earnings report, is really, really high.
That is just the way it is, and the more volatile a stock is, the higher they are. In other words, they are really expensive. So the idea has been to look at the probabilities in the options market and sell a call and sell a put that is outside the expected trading range of the stock, that the options market expects it to go.
And then the idea is, like in this case, the stock gaps way up so any puts that you sold are, essentially, going to be worthless. If the stock gaps down, any calls that you sold are, essentially, going to be worthless. But if the stock runs up way too far, or falls down way too far, then you actually lose money.
So what we did was, we sold a 325.00 call yesterday, but we bought the 330.00 call. So we have what is called a bear call spread. And then we also sold a 270.00 put and bought the 265.00 put to protect ourselves. So what we have is a bear call spread, a bull put spread. And the credit that we got, I think it was about $.91-$.95.
The risk that we are taking is $5.00 but we’ve got a credit coming in, which reduces that risk. So what I had done is, I just kind of calculated where the break-even was. And if the stock is up above 323.00, then we will be losing money on this trade. And indeed, it was up above 323.00 this morning. And it hung in there for quite a while before finally drifting lower.
And so the idea on this trade is, you want to be hanging tough. You want to wait a while after the stock gaps up because so many times, I think at one time it was up at 326.00 or higher, it was up almost 10 percent. When a stock gaps up that much it is very rare for it to keep going, sometimes it will, but that is why you have a hedge in place.
But typically, a stock like that has buoyed up there because there is a lot of retail buying. People are rushing to get the stock, they wish they hadn’t sold before. They have got to get in, they have got to be the first one in before everybody else catches on, which, the joke is, everybody has caught on, that is why the stock is up so high.
But at some point, that money runs out. Why? Because only the poor or capitalized traders are the ones that make that stupid decision, everybody else sits and waits. Once all that buying is exhausted, the stock is ultimately going to fall, just from its own weight. There is nobody massively selling or anything like that. It is just that nobody is really buying anymore.
So by being patient with this trade, we are just patient with it. We are now up 67 percent on this trade. As long as the stock holds below 325.00, and you know it is going to, as long as it holds below 325.00 we are going to pull in 100 percent profit on that. With the money that we got for selling this yesterday, we are going to be able to get to keep it all.
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