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Zynga Inc (ZNGA) Option Bulls Take Charge

Are Zynga Inc short sellers using calls to hedge?

by 5/29/2014 10:44 AM
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Call players have been active in Zynga Inc's (NASDAQ:ZNGA) options pits of late, which isn't too surprising, given that the equity's present price of $3.44 limits the profit potential of playing long puts. Drilling down on options activity at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), ZNGA has racked up a 10-day call/put volume ratio of 9.03. Not only does this show that more than nine calls have been bought to open for each put over the past two weeks, but it ranks in the bullishly skewed 79th percentile of its annual range.

Echoing this call-skewed bias is the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.33, which indicates call open interest roughly triples put open interest among options expiring in three months or less. This ratio ranks lower than 86% of similar readings taken in the past year, suggesting short-term speculators have rarely been as call-heavy toward ZNGA as they are now.

This trend was evident in yesterday's session, where calls outpaced puts by a more than 2-to-1 margin. Call buyers specifically targeted the weekly 5/30 3 strike, July 3 strike, and June 4 strike, which saw a collective 9,446 contracts change hands -- mostly at the ask price. Plus, open interest rose at each strike overnight, making it safe to assume that new bullish positions were initiated.

In today's session, meanwhile, more than 6,000 calls are on the tape in early trading, compared to fewer than 600 puts. The July 3 call may be seeing some additional buy-to-open activity, as a number of the contracts exchanged thus far have gone off on the ask side, and implied volatility is up 3.4 percentage points -- two indications that fresh positions are being purchased.

Technically speaking, Zynga Inc (NASDAQ:ZNGA) has done little to warrant such bullish positioning among the options crowd. For starters, the stock is lingering near its year-over-year breakeven mark. More recently, ZNGA has surrendered roughly 42% since hitting an annual high of $5.89 on March 11. Against this backdrop -- and with a healthy 8.6% of the equity's float sold short -- a portion of the recent call buying (particularly at out-of-the-money strikes) could be at the hands of shorts hedging against any unexpected upside.

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