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Bullish Traders Flood Zynga Inc (ZNGA) Options Pits

Are Zynga Inc short sellers hedging their bearish bets with calls?

by 5/21/2014 10:10 AM
Stocks quoted in this article:

Long calls have been preferred over puts in Zynga Inc's (NASDAQ:ZNGA) options pits in recent months, per the equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 6.21. Not only does this show that more than six calls have been bought to open for each put over the past 10 weeks, but it ranks in the 90th percentile of its annual range, meaning calls have been bought to open over puts at a near-annual-high clip.

Echoing this call-skewed bias among ZNGA option traders is the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.33, which ranks lower than 87% of similar readings taken in the past year. In other words, short-term speculators are more call-heavy than usual toward Zynga.

On Tuesday, calls were clearly the contracts of choice, outpacing puts by a more than 4-to-1 margin. The demand for short-term options was evident, as the equity's 30-day at-the-money implied volatility (IV) rose 2.8% to close at 55.8%. The most active option was ZNGA's weekly 5/23 3.50-strike call, where 4,777 contracts changed hands. The majority of these went off at the ask price, IV jumped 8.5 percentage points, and open interest rose overnight -- suggesting that a portion of the day's activity was of the buy-to-open kind.

On the charts, ZNGA has put in a dismal performance in recent months, with the shares off about 43% from their March 11 annual high of $5.89. Pressuring the stock lower has been its 10-day moving average, which is currently perched at $3.47.

Against this backdrop, sentiment outside of the options pits has grown increasingly bearish. Among covering analysts, for example, 18 out of 20 maintain a "hold" or "sell" suggestion toward the stock, and this morning, Piper Jaffray cut its price target on Zynga Inc. Elsewhere, short interest surged 34.3% in the latest reporting period, and now accounts for a healthy 8.8% of the stock's available float. As such, it's possible a portion of the recent call buying -- particularly at out-of-the-money strikes -- could be at the hands of short sellers hedging against any unexpected upside.

In today's session, traders are turning a blind eye to the early morning bearish brokerage note. At last check, Zynga Inc (NASDAQ:ZNGA) had tacked on 0.3% to trade at $3.36. However, due to the recent sell-off, the equity's Relative Strength Index (RSI) has dropped to 33 -- nearing oversold territory -- suggesting a near-term bounce may have been in the cards.

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