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Zynga Inc (ZNGA): How One Option Bull Gambled Big

A trader employed a large split-strike risk reversal on Zynga Inc

by 5/16/2014 9:25 AM
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Option Brief: Zynga Inc (NASDAQ:ZNGA) sunk below $3.50 yesterday, shedding 4.5% to close at $3.36. As such, put activity raced to more than two times the daily norm, while calls traded at a slower-than-usual pace. However, the session's largest transaction revealed that bullish sentiment was still well represented.

Around midday, matching 10,000-contract blocks of September 3 puts and 4.50 calls were exchanged. The former traded near the bid price for $0.25 each, suggesting they were sold; the latter did so at the ask price of $0.20 apiece, indicating they were purchased. In addition, open interest soared at both strikes overnight, making it safe to assume the two lots were freshly minted, in what amounts to a split-strike risk reversal, or synthetic long, on ZNGA. This theory is confirmed by Trade-Alert.

By selling the out-of-the-money (OOTM) puts and buying the OOTM calls, the speculator collected an initial net credit of $0.05 per pair of contracts, or $50,000 ($0.05 premium collected * 10,000 contracts * 100 shares per contract). If both options finish out of the money at September expiration, the trader will retain the entirety of that sum.

Additional (and potentially unlimited) gains will be had if ZNGA rallies past the purchased strike (4.50) in the next four months. On the other hand, if the shares slip below the breakeven price of $2.95 (sold strike less net credit) -- a level not breached on a daily closing basis since early September -- the trader could be assigned, and forced to buy the shares for $3 apiece, no matter how much they're worth.

Elsewhere, while yesterday's headline trader took up a bullish posture toward Zynga Inc (NASDAQ:ZNGA), two major names on Wall Street expressed concerns over the game maker's prospects. Specifically, Soros Fund Management and Tiger Global Management disclosed they have cut their stakes in the stock by 88% and 39.9%, respectively.


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