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Facebook Inc (FB) Bulls Roll the Dice with Weekly Options

Speculators bet on a quick trek higher for FB

by 3/20/2013 1:35 PM
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Bullish traders have taken a fancy to Facebook Inc (NASDAQ:FB - 26.03) today, as roughly 109,000 calls have traded so far. This is 58% above the norm, and almost double the number of puts exchanged. It appears that a number of speculators are hoping to make a quick profit by scooping up FB's weekly options, with the hopes that the stock will move higher over the next couple of days. Receiving the most attention is the weekly 3/22 26.50-strike call, where nearly 11,400 contracts have crossed the tape -- a healthy portion of them at the ask price, pointing to buyer-driven activity.

Specifically, these near-the-money calls changed hands at a volume-weighted average price (VWAP) of $0.14. Since today's volume has exceeded current open interest levels -- and implied volatility was last seen almost 5 percentage points higher -- it's likely that new positions have been added here. In other words, traders are counting on FB to rise north of $26.64 (strike price plus the VWAP) by the closing bell on Friday, when these weekly options expire. The delta for these calls sits at 0.27, giving them a more than 1-in-4 chance of finishing in the money.

Despite today's bullish attitude, there is still plenty of skepticism lingering toward the social networking site among the brokerage bunch. Although FB currently sports 15 "strong buys" and three "buy" recommendations, the remaining 10 covering analysts consider the stock to be a lukewarm "hold" at best. This leaves plenty of room for upgrades down the road, which could serve as a contrarian tailwind for the security.

Furthermore, short interest on FB ramped up by close to 39% during the past two reporting periods, pointing to an ample amount of sideline cash. Should these pessimists unwind their bearish bets in the near term, the stock could end up benefiting from a short-covering rally.

Facebook has climbed roughly 15% during the past six months, and has recovered almost 38% since tagging a mid-November low of $18.87.


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