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Option Bulls Bet on a Bounce Back for Zynga

ZNGA's January 2.5 calls have been extremely popular in the options pits

by 12/6/2012 10:28 AM
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Beaten down Zynga, Inc. (NASDAQ:ZNGA - 2.47) saw a swell in call activity on Wednesday. During the session, the equity saw about 23,000 calls cross the tape, more than its average daily call volume of 15,000, and 10 times the number of ZNGA puts traded.

Looking closer at the data, much of yesterday's action centered on the January 2.5-strike call, which saw just over 15,700 contracts change hands. Several blocks traded at the ask price of 18 cents, indicating that buyers were responsible for the majority of the volume. Open interest on the calls rose overnight by about 15,000 contracts, confirming that new bullish bets were added at this strike. By purchasing the calls to open, the buyers are expecting ZNGA to surge atop the $2.68 level (strike plus premium paid) before the contracts expire on Jan. 18.

This recent call-heavy activity supports the high levels of optimism seen on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where ZNGA dons a 10-day call/put volume ratio of 9.10. Furthermore, the security's Schaeffer's put/call open interest ratio (SOIR) of 0.52 indicates that calls double puts among options slated to expire within three months.

It's also worth noting that short interest for ZNGA has dropped by 43.6% during the past two reporting periods. These bearish bets account for just 2% of the security's float, representing a rather scant supply of sideline cash. In other words, it appears that relatively few traders are betting on the stock to decline.

Technically speaking, ZNGA has had its fair share of problems, burning off nearly 74% in 2012, and lagging the broader S&P 500 Index (SPX) by more than 16 percentage points during the past three months. The shares are faltering below the $2.50-$2.60 region, and are staring up at their 60-day moving average, which has only been toppled once (on Nov. 29) since mid-April. As mentioned earlier, January 2.5-strike call buyers need the stock to find a perch atop the $2.68 level by expiration -- which has occurred only once since early October.

But the potential for such an upswing looks promising, as the Internet gaming guru said it has applied for a gaming license in Nevada, to move players' virtual winnings into the real-money realm. This may also help the company turn around its recent fundamental slump stemming from a slip in popularity of online games. The shares have jumped some 6% in early trading, as investors appear to like ZNGA's new prospect.


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