To The Moon

Meta Platforms$Meta Platforms, Inc.(META)$ stock is up over 38% YTD and is now up almost double from its lows (+94%) in November at $172.88 as of Feb. 17 . This is attracting covered call investors who can make over 1% per month shorting out-of-the-money (OTM) calls.

Facebook reported on Feb. 1, 2023, that its Q4 revenue was $32.165 billion, down 4% from a year earlier. But this was significantly higher than what analysts had been expecting.

Higher FCF Expected

Moreover, the company is still producing solid free cash flow (FCF), $5.288 billion for the quarter and $18.4 billion for the past year. Granted, this was significantly lower than last year's $12.56 billion in Q4 2021 and $38.4 billion in 2021. But it still represents a 16.4% FCF margin for Q4 2022 and 15.8% for the year.

The main reason for the lower FCF was Facebook's higher capital expenditures (capex) spending over the past year, including in Q4. For example, capex in Q4 was $9.04 billion vs. $5.4 billion a year earlier.

To improve this performance the company said on the conference call it was flattening its organizational structure, laying off people, and expecting to spend less on capex. For example, management said it would spend $30 to $33 billion on capex this year, down from plans to spend $34 to $37 billion. This is comparable to the $31.4 billion it spent in 2022.

So, assuming revenue grows this year to $122 billion in 2023, up from $116.6 billion in 2022, Meta's FCF will likely be higher and its FCF margin will be much higher in 2022. That is likely why META stock has since moved significantly higher.

Selling OTM Covered Calls For Income

One popular way that investors are now playing this situation, given how high the stock has moved so quickly, is to sell out-of-the-money (OTM) covered calls. This means that the investor who owns shares puts in an order to “sell to open” call options of the stock at a much higher price for some near-term expiration period.

For example, March 17, 2023, calls at the $190 strike pricetrade for $1.92 per call optionat the midprice. This means that the call option seller doesn't have to relinquish their META unless it rises over 9.9% higher at $190.00 on or before March 17.

That also works out to an immediate yield of 1.11% (i.e., $1.92 call premium /$172.88 stock price). That works out to an annualized return of 13.3% if the investor can repeat this for 12 months in a row.

Moreover, for more conservative investors, the $195 call premium is also attractive. It is trading for $1.23 per call option, which represents a 0.71% yield (i.e., $1.23/$172.88), or 8.54% annualized.

This shows that investors in META stock can create 1% or more per month in income by shorting out-of-the-money call options that are 10% higher than today's price, and close to that for higher strike prices.