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Zynga Inc (ZNGA) Option Bulls Bet On a Post-Earnings Rally

Short-term Zynga Inc calls were in focus yesterday

by 4/17/2014 11:10 AM
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Option Brief: Zynga Inc (NASDAQ:ZNGA) is trading 1.5% higher at $4.17 this morning, amid the launch of the game maker's new title, FarmVille 2: Country Escape, for the Apple Inc. (NASDAQ:AAPL) iPhone and iPad, as well as Google Inc (NASDAQ:GOOGL) Android-based devices. Meanwhile, in yesterday's options pits, ZNGA calls stole the spotlight, with 36,000 contracts exchanged versus only 7,600 puts. Amid this activity -- especially at short-term strikes -- the stock's 30-day at-the-money implied volatility (IV) rose 9.1% to 76.1%.

Digging deeper, ZNGA's May 4.50 call was easily the most active option on Wednesday, as roughly 20,200 contracts -- including several large blocks -- crossed the tape. IV popped at the strike, and open interest added nearly 13,600 positions overnight, making it safe to assume new bullish bets were initiated. Long story short, yesterday's traders anticipate ZNGA shares will surmount $4.50 by the closing bell on Friday, May 16, when the soon-to-be front-month options expire. No matter what happens, however, the most the buyers have at stake is the initial premium paid.

Within the aforementioned option's lifetime, Zynga Inc (NASDAQ:ZNGA) is scheduled to report first-quarter earnings -- specifically, next Wednesday evening. While the company has matched or exceeded analysts' average bottom-line estimates in seven of the previous eight quarters, the stock's post-earnings reaction has traditionally been volatile. In January, a 1-cent earnings beat resulted in a 25.6% gain in the following week; however, in July 2012, an earnings miss prompted the shares to shed nearly 45% in the subsequent week.


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