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Zynga Bulls Change Their Tune, Throw in the Towel

December calls closed in ZNGA ahead of expiration

by 12/17/2012 2:51 PM
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Following a rush in demand for bullish bets in Zynga, Inc. (NASDAQ:ZNGA - 2.47) last week, these once-hopeful traders are heading for the exits. Call volume on the social-gaming concern is running about 30% higher than usual -- with 23,000 contracts already trading -- but the bulk of these are likely being sold to close.

In focus is the near-the-money December 2.5 call, where more than 15,000 contracts have traded on existing open interest of nearly 36,000. Implied volatility is dropping at this strike, however, and the majority of the volume has traded at or near the bid price, indicating much of the volume may be call buyers selling their existing positions to close.

If the options-buying crowd is indeed taking its proverbial ball and going home, it signifies a lack of confidence that ZNGA can move higher by Friday's close (when these front-month options expire). Last Wednesday, these calls were trading for an average of $0.15 after the shares enjoyed a news-related rally toward the $2.70 level. Today, the volume-weighted average price has dropped to $0.06. That's a 60% drop in fewer than four trading days, so these former bulls may wish to escape with a little bit of premium before time decay does its worst.

On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), these speculative bulls had driven up the stock's 10-day call/put volume ratio to 8.87 (meaning calls bought to open were outpacing puts by a factor of almost nine during the past two weeks). Also, this ratio is higher than 90% of the past year's readings. This enthusiasm hasn't been rewarded, it appears, but call buyers only stand to lose 100% of the premium paid for each trade.

As has been well documented, ZNGA has surrendered nearly three-quarters of its value since the beginning of the year. What's more, the stock has underperformed the S&P 500 Index (SPX) by 18 percentage points during the past three months (despite short-term outperformance over the past month).


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