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Short- and long-term call players targeted the $3 mark on Zynga Inc (NASDAQ:ZNGA) Wednesday, specifically, in the August, September, and March series. Of the roughly 20,000 calls that crossed the tape, around half changed hands at these three near-the-money strikes. The majority of the contracts that traded did so on the ask side, and open interest rose at each strike overnight, confirming that new positions were created.
Beginning with the August 3 calls, which expire at tomorrow's close, the volume-weighted average price (VWAP) for these contracts was $0.04, meaning traders expect ZNGA to trek north of $3.04 (strike plus VWAP) by week's end. With the stock trading lower in today's session, this would require a move of about 3.4% from the equity's current perch at $2.94. If the stock fails to retake $3 during the short life span of these calls, the most the speculators stand to lose is the modest premium paid.
Meanwhile, the further-dated September 3 calls were purchased for a VWAP of $0.18. Based on this average entry price, breakeven for the calls is $3.18 -- a level not seen by Zynga since its late-July earnings-related drop. Again, risk is limited to the initial cash outlay. However, implied volatility at this strike is deflated relative to ZNGA's 20-day historical (realized) volatility (46.8% vs. 62.9%), meaning premium is relatively inexpensive at the moment. In fact, the stock's Schaeffer's Volatility Index (SVI) reading of 46% is just 4 percentage points from an annual low.
The March 3 call buyers are allowing more time for their bullish bets to play out, therefore, they were willing to pay a loftier VWAP of $0.50. In other words, these speculators are giving Zynga seven months to rise 19%, in order for the stock to topple the breakeven mark of $3.50. However, the traders are able to close out of their trades at any time between now and March expiration. The options market seems fairly confident the equity will make this journey northward, though, as delta for the call is docked at 0.58, or 58%.
On the charts, ZNGA's price action has been erratic since early February, with the stock trading in a range between $2.50 and $4. However, the equity has still managed to chalk up a healthy year-to-date advance of 23.7%.
Meanwhile, a recent management shake-up at Zynga Inc (NASDAQ:ZNGA) did little to soothe hedge fund manager Jana Partners, which announced yesterday it is dissolving its stake in the online gamer.