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Facebook Inc (FB) Call Options Pick Up Steam

Facebook Inc traders are eyeing calls expiring in the next couple of weeks

by 6/6/2014 11:21 AM
Stocks quoted in this article:

Option Brief: Facebook Inc (NASDAQ:FB) has added more than 15% since dipping beneath $55 in late April, with the shares last seen at $62.91. In the options pits, speculators are wagering on even more upside for the social networking concern, with roughly 90,000 calls exchanged so far -- a 15% mark-up to the intraday average, and more than twice the number of puts exchanged.

Demand for short-term options is on the rise, reflected in the stock's 30-day at-the-money (ATM) implied volatility (IV) of 33.6%, up 2.6% from yesterday's close. In fact, the five most active options are calls expiring within the next couple of weeks.

The June 65 call is once again garnering attention, with more than 12,300 contracts exchanged -- the most of any strike. However, the International Securities Exchange (ISE) indicates that a healthy portion of the action is of the sell-to-close variety. Meanwhile, speculators seem to be establishing new positions at the June 67.50 call, where roughly 6,300 contracts have traded, mostly at the ask price. Plus, IV at the strike was last seen 0.5 percentage points higher, hinting at fresh initiations.

By purchasing the calls at a volume-weighted average price (VWAP) of $0.39, the buyers will make money if FB is sitting atop $67.89 (strike plus VWAP) at the close on Friday, June 20, when front-month options expire. North of breakeven -- which represents expected upside of 8% from FB's current price -- gains are theoretically unlimited, while risk is capped at the initial premium paid, should FB remain below the strike through the option's lifetime.

Since the calls are out of the money, delta stands at just 0.15, implying a roughly 15% chance of expiring in the money. However, even if FB fails to muscle atop the strike by expiration, the buyers can rest easy knowing they purchased the contracts at a relative discount. Despite today's ATM IV pop, the equity's Schaeffer's Volatility Index (SVI) of 31% sits just 12 percentage points from an annual low, suggesting the security's front-month options are attractively priced, on a historical basis. Plus, the stock's Schaeffer's Volatility Scorecard (SVS) of 100 indicates that FB has tended to make outsized moves relative to what the options market has priced in.

On the charts, Facebook Inc (NASDAQ:FB) has outperformed the broader S&P 500 Index (SPX) by nearly 8 percentage points during the past month, and is poised to close a second straight week atop its 20-week moving average -- a feat not accomplished since late March. Off the charts, the company is facing tighter privacy restrictions in Europe, while traders are looking forward to next week's Electronics Entertainment Expo (E3) conference, featuring now-Facebook-owned Oculus Rift.

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