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Zynga Inc (ZNGA) Call Volume Spikes Despite Technical Troubles

Speculators have taken the bullish route in ZNGA's options pits

by 8/26/2013 10:29 AM
Stocks quoted in this article:

Although Zynga Inc (NASDAQ:ZNGA) has surrendered more than 14% during the past three months, option players have shown a distinct preference for long calls over puts. Specifically, traders at the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) have bought to open 11,405 calls throughout the last five sessions, compared to just 520 puts, resulting in a call/put volume ratio of 21.93.

Expanding the scope to include activity on the NASDAQ OMX PHLX (PHLX), and extending the time frame to two weeks provides further evidence of this bullishly skewed bias. In fact, Zynga sports a 10-day ISE/CBOE/PHLX call/put volume ratio of 16.48. What's more, this ratio ranks in the 92nd percentile of its annual range. Even though long calls are typically more popular than puts on low-priced securities (given the limited potential for downside), ZNGA calls have been bought to open over puts with more rapidity just 8% of the time within the past year.

In the front-month series, this has translated into heavy accumulations of call open interest at the September 3, 3.50, and 4 strikes (the latter of which is home to peak levels of call open interest). From a contrarian perspective, these overhead marks could halt any short-term rally attempts made by ZNGA, as the respective 32,598, 24,239, and 33,934 contracts begin to unwind over the next several weeks.

In fact, ZNGA has not finished a daily close north of $3 since early August. While the equity has advanced 0.4% in today's session to trade at $2.90, it is meeting resistance at its 20-day moving average. This descending trendline -- currently located at $2.91 -- has not allowed a daily close north of it since July 25 -- the session prior to ZNGA's earnings-related dip.

In light of these technical struggles, there could be an alternative motive to this accelerated call activity. Short interest soared 58.9% during the last two reporting periods, and now stands at levels not seen since last summer. Simply stated, short sellers may be scooping up these long calls as hedges against their bearish bets.

Looking elsewhere, it seems to be an opportune time to pick up some options-related insurance on Zynga Inc (NASDAQ:ZNGA). The stock's Schaeffer's Volatility Index (SVI) of 44% ranks lower than 98% of similar readings taken in the past year. In other words, premium for ZNGA's short-term options is relatively inexpensive at the moment.


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