Meta -- formerly Facebook -- historically underperforms in February
You might have heard this past week about Meta Platforms Inc (NASDAQ:FB), the FAANG giant that fell from grace after a truly dismal earnings report. Mark Zuckerberg and company bemoaned supply chain disruptions for the report, which sent FB down 26.4% on Thursday. Just how bad was it? FB's market loss amounted to $180 billion overnight, according to Bloomberg. That's a market cap equivalent to financial stalwarts Morgan Stanley (MS) and Charles Schwab (SCHW).The market value loss is, per Financial Times, the largest one-day decline in a company's market value on record.
Amidst all of that carnage, subscribers to Schaeffer's Weekend Player service scored a 391.4% profit in just under a month with the Meta Platforms April 14, 2022 300-strike put. Below, we'll detail the expectational analysis that went into the options trade, as well as the unwinding of sentiment that fueled the decline.
When we recommended the trade on Sunday, Jan. 9, the stock had closed Friday at $331.79. Founder and CEO Bernie Schaeffer had identified several areas of interest; $334.74 was the site of the shares' 80-day moving average, while $336.55 was not only the site of FB's 200-day trendline, but also its 2021 closing price. Bernie had identified the $270-$285 as the target level for the trade, with a standard expiration date in April.
Last Wednesday, prior to Meta's report, the stock closed at $323. Despite what was then five-straight wins, FB's overhead 80- and 200-day moving averages loomed. Cue the earnings report, which reverberated across Wall Street. Big Tech had been in full-scale rally mode until Meta's earnings report spoiled the resurgence. How impactful was the report? Social media sector peers Twitter (TWTR), Snap (SNAP), and Pinterest (PINS) all shed 5.6%, 23.6%, and 10.3%, respectively on Thursday.
Analysts rushed to adjust their FB price targets Thursday morning, and this bearish shift likely contributed to the headwinds. No fewer than 22 brokerages issued price-target cuts, the steepest coming from Wedbush to $270 from $325. Looking back, there were some seasonal headwinds working against the stock too. Meta is one of the worst-performing stocks on the S&P 500 Index (SPX) in February, looking back at the last 10 years. Per Schaeffer's Senior Quantitative Analyst Rocky White, FB averaged a February return of -1.33%, with only three out of the se10 returns positive.
In gap situations, we take the Volume-Weighted Average Price (VWAP) over the first hour of trading. The VWAP over the first hour on Thursday was $58.23. We used 58.23 as the exit price on this option (391% gain), with the closing price for FB of $244.00.
This postmortem wasn't meant as a self-serving pat on the back, even though seeing a morally questionable companies such as Meta get a little comeuppance is a nice ancillary benefit to the financial return. More importantly, though, the nature in which traders were able to collect a 391% gain demonstrates the power of convexity in options contracts. Minimal dollars were put as risk while full participation in market direction was achieved.
Subscribers to Chart of the Week received this commentary on Sunday, February 6.