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Options volume is higher than usual on both sides of the fence for Facebook Inc (NASDAQ:FB) today. Calls are trading at a 67% mark-up to their typical intraday pace, while puts have crossed at two times their normal rate. So far, the most active strike is the October 47 call, where more than 44,000 contracts have changed hands -- the majority at the bid price, suggesting they were sold. Since volume outstrips current open interest levels, and implied volatility (IV) is up 1.9 percentage points, it's safe to assume some short call positions were created for a volume-weighted average price of $1.52.
By selling the calls to open, these traders are anticipating that FB will not muscle north of the 47 strike prior to the option's Oct. 18 expiration date. At last check, delta was lodged at 0.49, or 49%, signifying roughly a 1-in-2 chance that the option moves into the money during its lifetime.
As long as the stock remains south of the strike, the call writers will retain the initial premium received. If Facebook rallies north of $47, however, the speculators could be assigned -- in which case, they may be forced to deliver the shares at the strike price no matter how high the underlying's market price goes. In other words, the maximum potential loss on these trades is theoretically unlimited, as it's tied directly to the value of the shares.
Of course, given FB's strong long-term price action -- the shares have more than doubled in the past 52 weeks -- it's possible that some of these traders were writing covered calls in order to generate additional income and/or to set an acceptable exit price. This is especially likely due to the fact that the stock's 30-day, at-the-money IV touched an annual high earlier in the session, which means short-term options are expensive relative to the past 12 months. (Incidentally, the social network is scheduled to report third-quarter earnings after the close on Oct. 30, which may be impacting IV levels.)
Another strike worth mentioning is Facebook's January 2014 36-strike put, where the session's largest trade took place. Specifically, just after 10 a.m. ET, a block of 6,000 contracts changed hands at the bid price of $1.48. IV gained 3.3 percentage points on the trade, and volume surpassed open interest at the strike, pointing to sell-to-open activity -- a theory that data from the International Securities Exchange (ISE) confirms. In this case, the trader expects Facebook Inc (NASDAQ:FB) to remain above the strike price through January 2014 options expiration. So long as it does, the trader will retain the entire premium received. If FB breaches this strike, the put seller may be required to buy FB shares for $36 apiece in order to fulfill the obligation of the short puts.
Historically speaking, the shares have not traded below $36 since the end of July. FB was last seen at $46.63.
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