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Zynga Inc (ZNGA) Option Buyers Stay Hopeful

Are Zynga Inc short sellers picking up options insurance?

by 5/23/2014 2:42 PM
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Zynga Inc (NASDAQ:ZNGA) is fractionally higher at $3.32, but remains more than 12.6% lower year-to-date. What's more, the stock continues to stare up at its 10-day and 20-day moving averages, which have rejected the bulk of ZNGA's rebound attempts since mid-March, when the shares were lingering in annual-high territory. Nevertheless, options traders today are either gambling on or hedging against an intermediate-term rebound for the online gaming issue.

Roughly 16,000 ZNGA calls have changed hands so far today, compared to fewer than 1,800 puts. More than half of the action has transpired at the September 4 call, where 8,548 contracts have traded. Almost all of the calls crossed on the ask side, implied volatility is trending higher, and volume has exceeded open interest at the strike -- all pointing to buy-to-open activity.

"Vanilla" option bulls will profit if ZNGA is sitting north of $4.24 (strike plus volume-weighted average price of $0.24) at the close on Friday, Sept. 19, when the options expire. In fact, profit potential is theoretically unlimited north of this breakeven mark. Delta on the out-of-the-money (OOTM) call currently stands at 0.36, implying a roughly 36% chance of an in-the-money finish at expiration.

However, it's worth noting that short interest rocketed 34.3% higher during the most recent reporting period, and now accounts for 8.8% of ZNGA's total available float. Against this backdrop, it's possible that today's affinity for OOTM calls is attributable to short sellers looking for an intermediate-term hedge. Whatever the motive, though, risk is capped at the initial premium paid for the calls, should ZNGA remain south of the strike through the option's lifetime.

From a broader sentiment standpoint, today's appetite for long calls merely echoes the growing trend seen on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where traders have bought to open nearly six ZNGA calls for every put during the past 10 weeks. In fact, the resulting 50-day call/put volume ratio of 5.98 stands higher than 82% of all other readings from the past year, suggesting speculators are purchasing ZNGA calls over puts at a faster-than-usual clip.

As a result, Zynga Inc (NASDAQ:ZNGA) sports a Schaeffer's put/call open interest ratio (SOIR) of 0.33, which sits just 13 percentage points from an annual low. In other words, ZNGA's short-term options players have rarely been more call-heavy during the past year. Of course, considering ZNGA's technical fall from grace, it's not too surprising to see calls growing more favorable, due to the limited profit potential of long puts.

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