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Facebook Inc (FB) Bulls Target a Move Above $40

FB option players roll a near-the-money call to a higher strike

by 7/31/2013 1:46 PM
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Facebook Inc (NASDAQ:FB) is making headlines today after rising above its May 2012 IPO price to notch a new annual high of $38.31. Although the stock has now given back more than 2.3% today to trade at $36.74, bullish option traders are targeting continued upside over the next couple of months. Overall today, call trading activity is brisk, more than tripling the intraday volume seen in an average session. (Put players are rising to the occasion as well, as roughly 2.5 times the typical amount of put contracts have crossed the tape.)

Two strikes seeing notable attention are the October 37 and 41 calls, which have respectively seen more than 14,000 and nearly 11,000 contracts change hands. Based on existing open interest levels, trade data from the International Securities Exchange (ISE), and pricing information, it appears as though a number of small and mid-sized blocks were sold to close at the 37 strike for a volume-weighted average price (VWAP) of $2.91. Furthermore, similar blocks were purchased to open at the 41-strike call for a VWAP of $1.39. In other words, these Facebook Inc bulls are rolling up their long calls to a higher strike.

Given the reduced premium associated with the higher, out-of-the-money strike, breakeven (at expiration) for the newly opened bullish bets is now $42.39, or the strike price plus the VWAP paid. Not only is this more than 15% above current levels, but it represents territory never explored by the stock (since its bungled first day of trading).

Even though FB has only recently broken out of its doldrums, today's bullish speculation is nothing new. In the last 50 trading days, speculators on the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have purchased to open 1.14 million calls, versus just 477,150 puts. The resulting call/put volume ratio of 2.39 is higher than 77% of the past year's readings. In short, demand for long calls has been pronounced during the last 10 weeks. Similarly, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.50 illustrates that call open interest trumps put open interest by a 2-to-1 margin in the front three-months' series of options. The reading is just 2 percentage points shy of an annual low, suggesting that short-term option traders have rarely been more call-focused.

This upbeat sentiment is also reflected on Wall Street, as 26 of 30 covering analysts rate Facebook Inc (NASDAQ:FB) a "buy" or better. One of the outliers, though -- Richard Greenfield of BTIG -- holds a "neutral" rating on the stock and said today the investment is still not a strong one, unless someone was fortunate enough to buy near the bottom.

Even if FB doesn't muscle its way north of the $41 strike price by the time these options expire on Oct. 18, the call traders have risked only the premium paid -- and that premium is less steep than usual. Implied volatility at the October 41 strike hovers just south of 36%, compared with three-month historical volatility of 61.1%. Also, Schaeffer's Volatility Scorecard (SVS) of 91 suggests that Facebook Inc's short-term options are relatively inexpensive, compared to the odds of a sharp move on the charts.


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