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Zynga Inc (ZNGA) Traders Predict Limited Upside

Despite ZNGA's impressive 2013 performance, call sellers think its upside is limited

by 9/9/2013 1:34 PM
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Zynga Inc (NASDAQ:ZNGA) is surging today, up 2.7% to $3.10, despite last week's bearish initiation at Barclays. In the Farmville maker's options pits, call volume is running at about twice the typical intraday amount, and five times the current put volume. One of the most popular options traded so far is the March 4 call, where 6,400 contracts have crossed the tape -- including two 1,000-lots -- for a volume-weighted average price (VWAP) of $0.21.

Lest the reader assume that these traders were making bullish plays, it must be said that over four-fifths of the contracts swapped hands at the bid price. In other words, they were likely sold. What's more, since open interest at the strike is comprised of fewer than 1,000 contracts, it's safe to assume the positions were freshly minted. (Implied volatility for the sold calls is down 4.5 percentage points to 53.6%, however, likely due to the strong price action witnessed today.)

That being said, the speculators aren't assuming a bullish posture toward ZNGA, but rather a neutral-to-bearish one. As long as the shares remain under $4 through options expiration, the call sellers will pocket the initial premium received -- that is, the VWAP -- for initiating their short positions. If the stock rallies above the strike price, however, the traders risk having to deliver the shares at $4 apiece, no matter how high their market price is at the time.

Despite Zynga Inc (NASDAQ:ZNGA) advancing almost 32% year-to-date, the last time the shares hovered above the out-of-the-money strike was mid-March, when they hit an annual high of $4.03. Right now, the option has roughly a 1-in-3 chance of moving in the money by options expiration, based on its delta of 0.33, or 33%.

Option Briefs offer a concise look at the recent notable trading activity. For more in-depth coverage of securities from an Expectational Analysis« perspective, please visit our Trading Floor Blog section.


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