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Zynga Inc (ZNGA) Option Trader Eyes a Long-Term Struggle

Zynga Inc puts have been popular amid the stock's advance

by 2/6/2014 10:13 AM
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Although Zynga Inc (NASDAQ:ZNGA) has achieved a number of technical and fundamental wins of late, the stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.29 ranks in the 82nd percentile of its annual range. Simply stated, puts have been bought to open (relative to calls) at an accelerated clip of late.

On Wednesday, the most active contract in ZNGA's options pits was the January 2015 3-strike put, where 5,005 contracts changed hands. Nearly all of these translated into open interest overnight, making it safe to assume that new positions were initiated. Meanwhile, the majority of the volume crossed in one large block of 4,500 contracts closer to the ask price for $0.28, pointing to buyer-driven activity. In other words, this long-term trader expects ZNGA to fall 34% from its current perch to breach the $3 mark by January 2015 options expiration.

As touched upon, Zynga has been taking two steps forward on both the technical and fundamental front of late. Year-to-date, the stock has added an impressive 19%, compared to a roughly 3% drop for the broader Nasdaq Composite. Additionally, last week's well-received quarterly earnings report, round of cost-cutting measures, and acquisition helped ZNGA surge to a new annual high of $4.97 on Tuesday. In light of this, yesterday's deep out-of-the-money put buying could be indicative of a shareholder picking up insurance against any longer-term downside.

Elsewhere, Zynga Inc (NASDAQ:ZNGA) received some bullish brokerage attention yesterday, and more could soon follow. All but one of the 19 covering analysts have levied a "hold" or "sell" suggestion against the stock, and the consensus 12-month price target $4.26 represents a discount to the equity's current perch at $4.53. A continued round of upgrades and/or price-target hikes could be on the horizon, should ZNGA maintain its upward momentum. In today's session, the security has tacked on 1.4% right out of the gate.


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