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Bullish Betting Heats Up Toward Zynga Inc (ZNGA)

Zynga Inc traders are eyeing a rally by week's end

by 6/2/2014 10:10 AM
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Zynga Inc (NASDAQ:ZNGA) call volume outstripped put volume by a greater than 5-to-1 margin on Friday. In fact, each of the five most active strikes was a call. By session's end, it was the weekly 6/6 3.50-strike call that was at the top of the heap.

More than three-quarters of the 6,930 contracts traded at the weekly strike did so on the ask side, suggesting they were bought. Open interest also added nearly 6,000 contracts over the weekend, hinting at buy-to-open activity. In short, the speculators expect ZNGA shares to muscle atop the $3.50 level by this Friday's closing bell, when the weekly options expire.

More specifically, at-expiration breakeven is $3.59 -- strike plus the volume-weighted average price (VWAP) of $0.09 -- or 5.6% above the stock's current perch at $3.40. Theoretically unlimited gains are possible north of the breakeven mark. However, if ZNGA stalls south of the strike and the contracts expire out of the money, the call buyers risk losing the initial premium paid.

Friday's penchant for call buying is business as usual in ZNGA's options pits. During the past 10 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the gaming concern has racked up a call/put volume ratio of 7.85 -- higher than 71% of similar readings from the past year. However, with short interest swelling by more than 31% during the past two reporting periods, a number of these traders may be short sellers looking to hedge their bearish bets.

On the fundamental front, Zynga Inc (NASDAQ:ZNGA) CEO Don Mattrick is scheduled to appear at the Bank of America-Merrill Lynch Global Technology Conference on Wednesday. Meanwhile, technically speaking, the shares -- down 1.5% this morning -- have lost more than 10% year-to-date, and are facing overhead resistance at their 20-day moving average.

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