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Zynga Speculator Bets On Big Short-Term Move

One strategist constructed a long strangle with ZNGA's October puts and calls

by 9/25/2012 9:21 AM
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Option traders have preferred calls over puts on Zynga Inc (NASDAQ:ZNGA - 2.94) in recent weeks. During the past 10 sessions, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 4.92 calls for every put. Additionally, ZNGA's Schaeffer's put/call open interest ratio (SOIR) of 0.48 shows call open interest more than doubles put open interest among options expiring within the next three months.

ZNGA speculators were moving with a quickness on Monday; however, both calls and puts were in focus, trading at 1.5 times and 1.8 times their respective average daily pace. One swing trader used a portion of each to construct a long strangle in the October series of options. Specifically, one block of 1,000 October 3 puts traded for the ask price of $0.20, while a symmetrical block of October 3.50 calls crossed at the ask price of $0.13. A net debit of $0.33 was incurred on the play. Open interest rose at both strikes overnight, confirming that new positions were created.

By implementing the long strangle, this spread strategist will profit with each step north of $3.83 (the call strike plus the net debit), or each step south of $2.67 (the put strike minus the net debit) ZNGA takes through October expiration. To the upside, the reward is theoretically unlimited, while the potential profit to the downside is limited to $2.67. Should the stock churn between these two breakeven levels over the next four weeks, the most the trader stands to lose is $0.33 per pair of contracts.

A long strangle is typically initiated when the trader is expecting a big swing in the price, regardless of direction. With a glut of fundamental fodder awaiting ZNGA in the near term, a significant move by the stock is not out of the question. In fact, the equity dropped more than 7% on Monday, falling in sympathy with Facebook Inc (NASDAQ:FB).

Additionally, Zynga is tentatively scheduled to step into the earnings confessional the first week of October. Although the stock has had mixed results in its last three reports, each showing has been followed by a big price swing by the stock (each to the downside).

On the charts, yesterday's descent only added to ZNGA's technical woes. Since tapping out at its post-IPO high of $15.91 on March 2, the stock has shed roughly 81% of its value. This poor price action has been highlighted by ZNGA's 10-week moving average. Although eking out its first weekly close since late March atop this trendline last week, Monday's drubbing pulled ZNGA back below this technical ceiling.

The stock is looking to rebound in today's session, though, with ZNGA up 1.7% in pre-market trading.

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