Meta Shares Face Uncertainty Ahead of Earnings: Expert Options Strategy Revealed

Meta's fundamentals remain strong, but technical signals suggest caution as earnings approach.

LAT Editorial Team

Photo credits: CNBC

Meta Platforms is set to report earnings Wednesday after the market closes, with solid fundamentals driving nearly 30% year-over-year revenue growth. Despite this, technical indicators paint a more uncertain picture for the stock's near-term performance.

Options traders are pricing in a significant 7.5% move by week's end, reflecting Meta's history of volatile earnings reactions. Expert strategist Michael Khouw advises a nuanced options approach to balance risk and reward amid this volatility.

Strong Fundamentals Meet Technical Caution

Meta continues to benefit from improved ad pricing and sharper targeting, fueling impressive top-line growth. However, the stock is currently hovering around its 150-day moving average, recently dipping below it, which could signal a false recovery. Additional technical tools like the commodity channel index and Bollinger bands also suggest the stock is in a precarious position.

Earnings Performance: A Coin Toss for Investors

Historical data shows that buying Meta stock into earnings has been a near 50-50 bet. While the stock was higher two weeks post-earnings more often than not, the average return was a modest 0.92%, translating to an annualized return of about 16.8%. This volatility makes straightforward stock purchases less appealing for risk-conscious investors.

Options Market Activity Signals Big Moves

Recent options activity highlights significant call buying, particularly in June in-the-money 620 strike calls and May $675 calls, which are more cost-effective and earnings-focused. This reflects traders' anticipation of substantial price swings following the earnings announcement.

A Smarter Play: The Call Spread Risk Reversal Strategy

Rather than buying the stock or outright calls, Khouw recommends a call spread risk reversal strategy. This involves selling 625 puts and 750 calls to finance the purchase of 680-strike at-the-money calls. This approach reduces downside risk by avoiding losses on moderate price drops and lowers the breakeven point on the upside.

Limits worst-case loss to at least 8% better than owning the stock outright.
Avoids losses from small share price declines under 8%.
Caps upside gains at 8%, which is less than some historical post-earnings moves but improves the odds of a successful trade.
Historically, this strategy outperforms both buying the stock and buying short-term at-the-money calls, with an average return of 1.6% or nearly 29% annualized.

Looking Ahead: Balancing Risk and Reward

Meta's upcoming earnings report is poised to trigger significant stock movement, but the technical signals and historical earnings performance suggest caution. Employing a call spread risk reversal offers a strategic way to participate in potential upside while managing downside risk, making it an attractive option for traders navigating this uncertain environment.