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Option Brief: Calls outpaced puts by a roughly seven-fold margin yesterday in Zynga Inc's (NASDAQ:ZNGA) option pits. During the course of the session, 42,000 calls crossed the tape -- more than 40% of which transpired just before the noon hour as a two-legged block trade.
Specifically, one speculator targeted ZNGA's March 4 and 5 calls, simultaneously trading 8,600-lots at each strike. The lower-strike calls changed hands at the ask price, and open interest plummeted overnight, suggesting the deep in-the-money contracts were bought to close. Meanwhile, the higher-strike calls were exchanged at the bid price, and open interest spiked overnight, indicating the at-the-money (ATM) contracts were sold to open. In other words, it appears the ZNGA option trader rolled up his neutral-to-bearish bet.
In order for the trader to profit from the play, he now needs the shares to dip below $5 by March options expiration. Should that happen, the ATM calls will expire worthless, and the bettor will retain the initial premium received as his maximum potential reward.
However, should Zynga Inc (NASDAQ:ZNGA) continue to muscle its way up the charts -- the stock is up nearly 70% year-over-year -- the trader may be assigned, and on the hook to deliver the shares at $5 apiece, no matter how high they're trading. At last check, the social gaming stock was off 1.5% at $5.02.