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Facebook Options Trade Fast and Furious

FB followers are placing eleventh-hour option bets

by 11/14/2012 1:59 PM
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Facebook Inc (NASDAQ:FB - 21.62) options are flying off the shelves, with both calls and puts heating up. Already today, the social networking site has seen roughly 248,000 calls and 373,000 puts change hands, compared to its average intraday volume of about 73,000 calls and 86,000 puts. Digging deeper, we find that most of the action consists of eleventh-hour bets, as November-dated contracts account for nine of the 10 most active thus far.

Upon closer inspection, it looks like traders are employing both calls and puts to place neutral-to-bullish bets on FB. The November 20.50 strike has seen nearly 26,400 calls and 31,000 puts change hands, exceeding open interest on both sides of the tape. A healthy portion of the calls crossed at the ask price, suggesting they were bought, while the bulk of the puts traded at the bid price, hinting at sell-to-open activity.

By purchasing the calls to open, the buyers are expecting FB to extend today's post-lockup rally through Friday's close. Specifically, the volume-weighted average price (VWAP) of the calls is $0.86, meaning the buyers will profit as long as the stock continues its climb above the $21.36 level (strike plus average premium paid). However, even if FB retreats in the next couple of days, the traders' maximum risk is capped at the initial cost of the calls.

In a similar vein, the November 20.50 put writers are expecting FB to remain north of $20.50 through the end of the week. In this best-case scenario, the puts will remain out of the money, and the sellers can retain the entire premium received at initiation. Should FB breach this level within the options' short lifetime, the sellers could be assigned -- meaning they'd have to buy FB shares at $20.50 apiece, representing a premium to what they'd pay on the Street.

Meanwhile, the November 21 put has seen more than 68,000 contracts change hands on open interest of around 46,200 contracts, pointing to newly established positions. The majority of the puts traded at the ask price, indicating "vanilla" buy-to-open activity. By purchasing the puts at a VWAP of $0.31, the buyers will reap a reward if FB backpedals beneath the $20.69 level (strike minus premium paid) by Friday's close.

Around 800 million shares became available for sale this morning, thanks to the end of a post-IPO lock-up period. Previous lock-up expirations have resulted in selling pressure, but it looks like insiders are hanging on to their FB stakes this go-round. At last check, FB has rocketed roughly 8.8% higher to wink at the $21.62 level, and is on pace to end back atop its 60-day moving average.


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