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Facebook Inc (FB) Drop Doesn't Stop Option Bulls

Facebook Inc speculators are purchasing round-number calls

by 5/6/2014 2:10 PM
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Option Brief: Facebook Inc (NASDAQ:FB) is down 2.9% at $59.47, swooning in sympathy with sector peer Twitter Inc (NYSE:TWTR). Nevertheless, calls are the options of choice among FB speculators, with roughly 84,000 contracts exchanged, compared to about 58,000 puts. What's more, traders are taking a shine to the stock's short-term contracts, as its 30-day at-the-money implied volatility (IV) is 2.8% higher at 40.1%.

Most popular by a mile is the equity's May 60 call, where more than 13,000 contracts have traded at a volume-weighted average price (VWAP) of $1.83. A healthy portion of the calls crossed on the ask side, and IV is 2 percentage points higher, hinting at newly bought bullish bets.

The buyers of the calls will reap a reward if FB is sitting atop $61.83 (strike plus VWAP) at the close on Friday, May 16, when front-month options expire. In the wake of FB's plunge, delta on the calls has fallen to 0.47 from 0.62 at Monday's close, implying a less than 1-in-2 shot of the option expiring in the money. Should FB remain south of the round-number strike through the option's lifetime, buyers still holding the contracts will forfeit the initial premium paid.

On the charts, Facebook Inc (NASDAQ:FB) has underperformed the broader S&P 500 Index (SPX) by more than 15 percentage points during the past two months. The stock has struggled beneath its 10-week and 20-week moving averages, which are on the verge of a bearish cross. Should the security continue to flounder beneath these trendlines, a wave of downgrades could exacerbate selling pressure on the shares. Currently, 31 out of 34 analysts maintain "buy" or better opinions on the underperformer.


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