Meta's Muse Rally and the 10 Million in Puts Betting It Fades

Someone's fading the muse rally in Meta. Welcome back to Signal versus Noise, where we take a look at unusual options activity on the tape and ask the question, what's the market really saying beneath the move? Today's name is Meta Platforms, ticker META, a name that we covered in recent weeks following a lawsuit regarding its teenage privacy restrictions. But the stock is up 17% and then some over the past 20 sessions. right now. Tuesday night, Meta announced this new AI assistant called Muse. It can book travel, fill out forms, negotiate bills, and run multi-step efforts on your behalf. Uh, Wall Street's effectively saying today that all the AI capex spending that's been going on for the past two years that has punished the stock since its highs last September. Maybe it was all to be rewarded. Muse is impressing the market here today, up more than 5% so far today, 6% now. Closed up 4.8% 8% yesterday, which is a huge move in a mega cap name for two sessions, never mind the 17% it's covered over the past 20. But we do see that there are traders out here who are fading this move. They think that this is a one-day stock pop and that ultimately Met is going to return back to its pres-scheduled program, which for the better part of the last, we can now call it almost 6 months going into March. This stock has been rangebound between 520 and 690 or so. But let's take a look at the strikes and where they're operating. Two September 25th puts, both at the money, both expiring in 16 days, were bought aggressively here recently. The larger trade was the September 25th 640 put. Premium spent 8.64 million on the put side. Implied volatility 41% before the positions put on. Open interest before the trade hits today is just 56 contracts as you can see here on the screen. So volume for this particular trade was 4,753 contracts making the bulk of the volume in today's market. 93% of the volume lifted the offer and the rough odds of this paying out are about 2 in5. That is the main trade. There was a smaller secondary trade here that's also in September 25th 16 days to expiration at the 645 put. But on its own it's 1.6 million in premium. Same 41% implied volatility. Open interest there just 24 contracts prior. You could see that we have 785 here traded today. 72% of the volume hit the ask and the rough odds for this one hitting are closer to a coin flip. So altogether that's 10.24 million in puts bought on Meta the morning after Meta starts rallying on Muse right now. So the open interest here is an interesting signal, right? The 640 strike with only 56 contracts sitting there before the nearly 4,800 traded tells you that this was built from basically nothing right now. It doesn't look like a stale line getting shuffled around a position being rolled, even a stock replacement trade of sorts because you wouldn't be doing that through puts. This is new downside position, plain and simple, opened against uh significant strength in the market here on this Wednesday. But the break even on the 640 put is about $621.82. So, the buyer is not looking for any sort of a collapse here. It just needs a modest pullback over the last few sessions, at least erasing some of the move over the last few sessions, uh, at some point between now and the next 16 days here. And I think that's a fairly tradable read. They're just bearish and they're thinking that this thing is going to pull back in. So, we'll call this the fate of the muse move, which using at the money puts with enough time to catch a short-term reversal while avoiding the next earnings event. It kind of makes sense if you're thinking that this is related to un misunderstood, I should say, uh, news flow here. Both of these puts are expiring before Meta's next earnings release, which as we can see here on the platform, uh not on the immediate purview, right? They just reported a few weeks back. It's going to be some time until they report again. Nothing's coming in September. We really should be waiting until late October, early November to see that sort of information right now. So, um why is Meta finally getting out of the woods here today? Why are we having this stock reaction the past two sessions right now? The product itself is worth explaining a little bit because it is the reason after all why the stock is uh is moving here. Muse connects to email, calendar, payments, health, smartphone, and shopping. Get ready. [music] [music] >> Finally, Meta has a new product cycle that it can hang its hat on here. We've been dealing with the decline of the metaverse and unwieldy catch-up AI spending, AI capex spending for the better part of the last year. And now that we've gone through this window of transition, we've finally started to see that maybe Meta has been able to turn all this capital spending into tangible monetization proof, which has been the big ask for companies over recent quarters. Yes, you're spending all this money. Yes, Rome wasn't built in a day. If you build it, they will come. Well, are they here yet? Because we don't really see anyone. And companies that have been able to prove that they can monetize AI like your Microsoft and your Amazon through Azour and AWS for example have come out of this earning cycle a little bit cleaner than others. And here you have Meta. Meta now is telling you what we have a new product to offer related to our AI spending. We can monetize this almost immediately. So this is something that users will actually pay for a personalized AI assistant. That's how the market's reading this here today. And there's new revenue streams on the other side of all the capex spending. So, um, where does this potentially fall apart? So, looking through the fine print here, Muse data does not feed Meta's ad systems. So, Meta is still an advertising company, right? And this product itself supposedly is going to be walled off from the ad machine by design. So, subscriptions do carry the entire monetization burden here. there's no way for them to pull over another segment of the business and make these two synergize in a manner that will ultimately uh you know prove a creative or we'll call it accelerate other lines of revenue. But if we see that what the you know makings of this are $20 a month it's going to take roughly 600 million paying subscribers to cover one year of meters capex and muses us only 18 and over. So the math is a little bit tighter. It's not going to be the panacea that I think most people think it's going to be. Um, Wall Street leaning the other way. Uh, BFA reform buy with that $810 target. Key Bank is at 780 and says the market underestimates Meta's AI positioning. You have Mizuo here at 750 calling up this a product cycle that's not priced into the shares at present time. Consensus across the 62 analysts that cover Meta right now is $754.77 with the strong buy. Target range is wide though, 580 up to 1,000. And so there's still a lot of debate here over what the company's actually worth. But maybe with the price action we're seeing over the past two days, we can make the affirmation that the market collectively is saying that Muse is a gamecher and it warrants a rerating in the stock. But today's put buyer is saying that rerating has gone too far. Right? Whether or not Muse solves the free cash flow problems that Met has been facing is another story unto itself. We say you need 600 million users paying $20 a month. It's only open to people in the US 18 years and older. There are not 600 million people in the United States 18 years or older who are using Facebook that are going to be paying $20 a month. So the bigger debate is still Meta's free cash flow here, right? Meta's Q2 free cash flow fell to 784 million from 8.55 billion uh year ago. And that has been a huge problem for investors all along the way. Will the math actually math here? Think about it. Are there 600 million adults over the age of 18 that are using Meta in the United States that will all become $20 per month users of the platform? No. Not right away. And certainly there aren't even that many adults in the United States. This is a country of like 360 million people at this point in time. So how Meta can repair its free cash flow through this product offering is another story here. But I think maybe that's why the puts make sense as a short-term trade. Right? We're looking through the details here right now. And folks who are paying attention to the details may see that this stock that's rallied 17% over the past 20 sessions perhaps predicated around legal issues or lack of issues and now a new product offering. Maybe it's just gone too far too fast. So, uh, can we talk about what the levels are moving forward? The first line is going to be 645. That's the upper put strike and basically where the stock was trading into the move. If Meta is able to hold 645, you just listen, bad timing for that put buyer here. 640 is the first big strike. If Meta gets down there immediately, then the larger trade is obviously in play. But the break even on these trades, we're talking about getting down towards the lower 620. 62182 is the break even on the bigger of the two trades. And so when you get to there, that's when all of a sudden this thing really starts to hit. So if we are above 62182, the buyer's going to need more downside or at least some more marktomarket movement before time decay ultimately catches up to them. So let's talk about the signal versus noise here. The signal is that the options tape is fading a very popular headline in a mega cap tech name right now. Uh we're talking about over $10 million in puts that are bought near at the money effectively uh almost from no open interest. They're bought aggressively into the 17% rally expiring well before earnings. So, someone saying that this Muse move is a little too firm and needs to cool off. But the noise may be the broader product cycle here. Yeah, Wall Street likes it. If you read the news recently, Bill Aman's been adding size. Uh MetaMay finally have a consumer AI product investors can underwrite. uh a shortdated put can absolutely win on the idea that this thing has rallied too far too fast and miss the longer term narrative because if Meta opens up this product to say it's European audiences or Asian audiences getting to those 600 million users paying $20 a month may not be all that difficult. So short-term trade, yes. Is this something that you'd want to have for the next six months or a year? Betting against Meta, I don't know. We'll see if it plays out. But let's see what you think. Let us know in the chats below. What's the signal in the noise here? Would you take these trades? Has Meta moved too far? too fast on the Muse rally? Are you going to be using Muse yourself as uh the personal AI assistant? Let us know in the chat below. Of course, this has been Signal Versus Noise. You can always like and subscribe for more videos. Thanks for watching Tasty Life.