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Are Zynga Inc (ZNGA) Option Players Bracing for a Dip?

Zynga Inc puts are popular ahead of a rival's IPO

by 3/25/2014 12:29 PM
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Option Brief: Zynga Inc (NASDAQ:ZNGA) is up 3.5% at $4.86, paring most of yesterday's losses, ahead of rival King Digital Entertainment Plc's expected Big Board debut on Wednesday. Despite today's bounce, ZNGA puts are trading at a slightly accelerated clip compared to the stock's average intraday volume, with roughly 6,600 contracts exchanged. Furthermore, the equity's 30-day at-the-money implied volatility (IV) is up 2.8% at 59.2%, pointing to rising demand for short-term contracts.

The most popular put is the April 4.50 strike, where more than 2,200 contracts have changed hands. In fact, a block of 2,000 puts traded earlier today at the ask price of $0.11, suggesting they were bought. Plus, IV jumped 2.6 percentage points at the time of the trade, hinting at the initiation of new positions.

By purchasing the puts to open, the buyer expects ZNGA to backpedal south of $4.50 by the time the newly front-month options expire at the close on Thursday, April 17. Delta on the puts stands at negative 0.30, suggesting a slimmer than 1-in-3 shot of an in-the-money finish. However, even if ZNGA remains north of the strike -- which hasn't been breached on a daily closing basis since Feb. 6 -- the most the buyer will lose is the initial premium paid for the puts.

Currently, Zynga Inc (NASDAQ:ZNGA) sports a Schaeffer's Volatility Index (SVI) of 53%, which stands higher than just 27% of all other readings from the past year. In other words, the stock's short-term options are relatively inexpensive right now, from a historical perspective.


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