Shares of social media giant Meta Platforms, Inc. (FB) have recently broken a downward channel ahead of the company's fiscal fourth quarter earnings report. The rebranded Facebook, which has shed more than 7 % since the start of 2022, recently received a buy rating and a $400 price target from analysts at Stifel. The share price surged 3.8%, in line with the wider market that is attempting to recoup January losses. Analysts expect Meta to announce $3.83 in earnings per share (EPS) and $33.44 billion in revenue when the company reports earnings on Wednesday, Feb. 2, after the market closes.
Investors will be keeping a keen eye toward Meta's Facebook Reality Labs (FRL) and Family of Apps segments in the quarterly report, as the company continues to separate its core social media business from longer-term projects like the metaverse. The metaverse represents the company's plan to create an environment that more realistically resembles the way people communicate face-to-face and is expected to reduce overall operating profits by $10 billion for the 2021 fiscal year. As investments into the metaverse affect Meta's bottom line, investors could begin to grow impatient.
Ahead of earnings, option traders appear to be positioning themselves for the Meta share price to continue its wider overall downward trend. That's because, while call options outnumber puts in both recent trading volumes and the open interest, implied volatility suggests that traders are selling upside calls while buying downside puts.
Meta's share price has experienced the same kind of downward trend that the large-cap technology stocks have experienced since the beginning of 2022. However, it should be noted that both the Apple Inc. (AAPL) and Microsoft Corporation (MSFT) share prices rebounded to the upside after option traders were similarly positioned ahead of their earnings reports.
- Traders and investors have bid down the share prices of Meta since the beginning of 2022.
- The Meta share price recently closed above a zone of buying support based on volume.
- Mega-cap stocks have suffered in 2022 but regained some ground in the past week.
- Calls are priced slightly higher than puts after accounting for intrinsic value.
- Historical volatility-based support and resistance levels allow for a larger move to the upside.
Tech Sector Weakens
The technology sector has experienced a recent downturn as the market has braced for the Federal Reserve's planned interest rate hikes and end of quantitative easing in order to combat rising inflation. In an inflationary environment, tech stocks tend to underperform, as large debt on their balance sheets becomes more expensive to hold. Rising interest rates, which counter inflation, could also reduce high-growth tech companies' future earnings and bottom line. Since the beginning of 2022, State Street's Technology Sector ETF (XLK) has lost 7.7%, while the S&P 500 Index ETF (SPY) has fallen 5.8%. Invesco's Nasdaq-100 ETF (QQQ), which is technology heavy, has fallen 9.6% since the beginning of the year.
The chart below compares the recent performance of a collection of stocks known as "FAANG" stocks, although this acronym is considered outdated since Facebook changed its name to Meta. These stocks are known for incredible growth during the 2010s and are the largest stocks by market cap in the technology sector.
It's notable on this chart that, while these stocks tend to move in similar directions, there are sometimes deviations from the group. Netflix, Inc. (NFLX), for example, recently plunged 21% the day after reporting earnings, highlighted by the red arrow. Conversely, Apple rose nearly 7% after reporting earnings, which is highlighted in green. Prior to earnings, option traders appeared to be positioned for both Apple and Microsoft to fall, similar to Meta; however, each company's stock rose after releasing quarterly reports. The earnings-based share price increase from two of the largest stocks by market cap could be partially responsible for driving markets as a whole upwards at the end of January.
A comparison between technical analysis of share price movement and recent option trading activity can grant chart watchers valuable insight into the overall sentiment toward Meta stock ahead of the earnings announcement. The chart below illustrates the recent price action for the Meta share price as of Monday, Jan. 31.
This chart illustrates how the Meta share price drifted higher after the prior earnings report, before falling to a low range of the volatility range at the beginning of December. After steadily rising above its 20-day moving average, the Meta share price moved steadily downward in January, highlighted in blue. The recent share price increase ahead of earnings has seen Meta stock positioned to break the extended downward channel, closing just below its 20-day moving average, in an average range on this chart.
The purple bands on this chart are an extreme historical volatility range formed by 4 standard deviations of 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR) for Meta stock. ATR is a standard tool for illustrating historical volatility over time. These bands could be considered to represent the extreme ranges of option pricing.
It's notable that these bands have slowly yet steadily widened as the quarter has continued. This could mean that option pricing is growing ahead of the Meta earnings announcement, which could translate into investor uncertainty regarding the report.
Volume Profile and Option Activity
Comparing price action and option trading can provide chart watchers insight into the sentiment traders and investors hold toward a company's future performance. However, further context of price action in terms of volume could illustrate areas of support and resistance, which could provide additional context to option open interest. The chart below illustrates the recent price action of Meta, in addition to a price-based volume pattern on the left side.
This price-based volume pattern depicts the prices where investors have bought and sold the shares previously. A noticeable amount of buying in the past often implies that investors will feel the desire to defend their positions at those same prices by buying more shares or at least not selling any further. When volumes at a given price are low or nonexistent, it implies that few, if any, investors have the need to defend their positions at these levels.
The Meta share price recently rose above a relatively thin volume zone of buying. This zone, highlighted by the green rectangle, represents an area of low volume; however, the volume in this zone appears to be biased toward buying. That could make this zone a significant area of support for prices going forward. Below this zone appears to be a thin zone of selling, which could prove to be significant if the share price were to decline.
Option trading sentiment appears bullish at first glance. That's because recent trading volumes of Meta options featured 169,000 calls compared to 84,000 puts. Likewise, the Meta open interest appears bullish at first glance, as it features 1.1 million calls compared to 848,000 puts. While at first look these open interest figures appear bullish, a further analysis illuminates further details.
For Feb. 4, the next weekly option expiration date, it appears that option traders are placing significant bearish bets on Meta. That's because, while the number of upside calls outnumbers downside puts, implied volatility for these calls options is declining as the open interest is rising, suggesting that option traders are taking short positions in these options. Similarly, implied volatility for downside puts is rising as the open interest is rising, indicating that traders are buying these options.
Ahead of earnings, implied volatility tends to be at its highest. This creates an environment that is beneficial, yet risky, to option sellers attempting to capture volatility decay after a stock reports earnings. While implied volatility is rising, the skew of this volatility is very bearish. Implied volatility skew shows the market's bias for pricing in volatility risk to the option premium of downside puts and upside calls. If the implied volatility for downside puts is increasing relative to upside calls, then that suggests that the market is pricing in for a larger fear of a downside move. Current skew is trending higher, which translates to a bearish outlook for Meta stock.
As one of the largest technology stocks by market cap, investors will be watching Meta's earnings closely. While the market is expecting a reduction in earnings due to the company's heavy investments into building the metaverse, option traders appear to be placing increasingly bearish bets. If these bets were to unwind in a post-earnings share price reaction similar to that of Apple and Microsoft, it could place unexpected upward pressure on the Meta share price.