To The Moon

$Meta Platforms, Inc.(META)$ will report its Q2 results after the market close on July 31, and Meta's management will likely discuss the company's AI revenue opportunities following the launch of its new open source AI grand model Llama 3.1. Strong results and an optimistic outlook from Meta, which has a high weighting in the $S&P 500(.SPX)$ , could lead to a sustained rally in the Mag7 and the $S&P 500(.SPX)$.

• According to Wall Street analyst estimates, Facebook parent is expected to report total revenue of about $38.35 billion for the second quarter of 2024, which is expected to increase by about 20% compared to the same period last year.

• Analysts' consensus estimate is for net income of about $12.31 billion, or $4.71 per share, which would be a big 58% increase from the same period last year.

Investors are paying close attention to Meta's advertising revenue in the Q224, which is Meta's core revenue engine.

Citigroup analysts expect this number to grow 20.5% year over year to $37.95 billion, mainly because of the strengthening of the macro environment for advertising and the AI technology embedded in Meta AD delivery tools is expected to enable more advertisers to efficiently deliver ads and reach more groups.

In the view of many Wall Street analysts, Meta AI chatbot launched by Meta, which has more than 3 billion users worldwide, will become the most popular AI chatbot in the world, far exceeding ChatGPT, which is also the core logic of analysts who are optimistic about Meta's stock price: That is, user applications such as advertising and software applications are undoubtedly the most proficient areas of Meta. With a huge user base of up to 3 billion, Meta is in the best position for AI monetization.

1.What does the options market expect from Meta earnings?

Currently, traders are pricing in potential volatility in $Meta Platforms, Inc.(META)$ 's share price.

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Over the past 12 quarters, the options market has overestimated the change in META's stock earnings 42% of the time.

The average expected share price change after an earnings announcement was ±8.7%, while the average actual earnings change was 13.2% (absolute).

This suggests that META's volatility tends to be higher than the options market's forecast earnings share price response. Over the past 12 quarters, Meta's largest gain has been 23.3% and its largest decline has been 26.4%.

Investors can bet on big swings in Meta's share price in both directions by buying both call and put options through a compound options strategy known as Straddle. You can also choose to sell the corresponding call option and put option and bet that Meta stock price will not fluctuate greatly in both directions.

2. What is "Straddle"?

A straddled option is a neutral options strategy that involves simultaneously buying a put option and a call option on an underlying security with the same strike price and the same expiration date.

When the price of the security rises or falls relative to the strike price by more than the total cost of the premium paid, the trader will profit from the long straddled option. As long as the price of the underlying security is very volatile, the profit potential is almost unlimited.

A short straddles strategy is the simultaneous sale of a call option and a put option with the same strike price and expiration date. Used when the trader believes that the underlying asset will not rise or fall significantly over the life of the option contract. The maximum profit is the royalty collected by selling the option, and the potential loss can be unlimited.

Short Straddle Option Strategy With Example

Straddling options can provide traders with two important clues as to how the options market feels about a stock. The first is the expected volatility of the security in the market, and the second is the expected trading range of the stock before the expiration date.

3. Meta short straddle case

With Meta's current share price at $458.50, taking an option with a Meta strike price of $460 and an expiration date of August 2 as an example, it takes only two steps to establish a Meta short straddler strategy.

Step1 is to sell a call option with a strike price of $460 at the opening at $23.08 for a premium of $2,308.

Step2 is to sell a put option with a strike price of $460 at the opening at the price of $19.38, earning a premium of $1,938.

The investor received a total of $4,246 in royalties on the deal, but in exchange for his obligations.

• The first is the obligation that comes with the put option, where the buyer of the put option can sell the $Meta Platforms, Inc.(META)$ to the investor at any time for $460.

• The second is the obligation of the call option, the investor must meet the demand of the call buyer at all times, handing the $Meta Platforms, Inc.(META)$ to the buyer for $460.

Meta's closing price must be between $417.55 ($460-$42.45) and $502.45($460+$42.45) (excluding commissions) for the straddle strategy to make a profit.

Would you consider this strategy today?

Happy investing.