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The shares of Zynga Inc (NASDAQ:ZNGA - 3.38) are bucking the broad-market trend higher today, but that hasn't deterred the option bulls. In early afternoon action, the social gaming concern has seen roughly 27,000 calls cross the tape -- a 24% mark-up to its average intraday volume, and nearly three times the number of ZNGA puts exchanged.
Digging deeper, speculators seem to be establishing new positions at the weekly 3/22 3-strike call and the April 4 call, which have seen around 1,700 and 2,700 contracts change hands, respectively. Volume has exceeded open interest at the weekly strike, and implied volatility is trending higher on the newly front-month call -- both signs of fresh initiations. Plus, the majority of the calls have crossed on the ask side, suggesting they were purchased.
The volume-weighted average price (VWAP) of the 3-strike calls is $0.34, meaning the buyers' profit will increase the higher Zynga moves beyond the $3.34 level (strike price plus VWAP) by the end of the week, when the options expire. Meanwhile, the VWAP of the 4-strike calls is $0.09, indicating a breakeven of $4.09 for the buyers. However, these speculators have more time for their bullish predictions to pan out, compared to the weekly call buyers. In both cases, the maximum risk is capped at the initial premium paid for the contracts.
Technically speaking, it's been a solid start to the year for ZNGA, with the shares up more than 40% in 2013. However, since touching a multi-month high of $4.03 earlier this month, the stock has pulled back to test a foothold atop its 200-day moving average. Pressuring the security today was a bearish brokerage note, with BofA-Merrill Lynch downgrading Zynga Inc to "neutral" from "buy."