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Zynga Traders Roll the Dice Ahead of Earnings

ZNGA speculators are scooping up at-the-money weekly options

by 2/4/2013 2:47 PM
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Option traders are placing short-term bets on Zynga Inc (NASDAQ:ZNGA - 2.56), with speculators picking up weekly 2/8 2.50-strike options. So far today, about 2,200 contracts have traded on the call side of the strike, and more than 2,000 contracts have crossed on the put side. Both call and put volume has exceeded open interest, and most of the weekly options changed hands at the ask price, pointing to buy-to-open activity.

More specifically, the 2.50-strike calls have crossed at a volume-weighted average price (VWAP) of $0.24, meaning the buyers will reap a reward if ZNGA conquers the $2.74 level (strike plus VWAP) by Friday's closing bell, when the options expire. Meanwhile, the VWAP of the 2.50-strike puts is $0.13, indicating a breakeven of $2.37 (strike minus VWAP) for the buyers.

Digging even deeper, the delta for the call is 58, suggesting a 58% chance the options will finish in the money at expiration. On the flip side, the delta for the put is negative 42, implying a 42% chance the puts will be profitable at the end of the week. However, even if ZNGA settles right at the $2.50 marker at expiration, the most the buyers are risking is the initial premium paid for the options.

From a broader sentiment perspective, ZNGA calls are growing increasingly popular heading into tomorrow night's earnings release. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open almost eight ZNGA calls for every put during the past two weeks. What's more, the stock's 10-day call/put volume ratio of 7.65 ranks in the 81st percentile of its annual range, pointing to a healthier-than-usual appetite for bullish bets of late.

However, considering ZNGA is trading in the low single digits, this affinity for calls isn't necessarily surprising. The upside on a call purchase is theoretically unlimited, while the upside of a put purchase is determined by the equity's potential downside. In other words, the reward from buying puts on a "cheap" stock is minimal; the aforementioned weekly put buyers, for example, can make up to $2.37 (strike minus premium paid), and only if ZNGA falls to $0 by the end of the week.

Technically, the shares of ZNGA have tacked on about 22% since touching an all-time low of $2.09 in mid-November, with the most recent leg of their uptrend underscored by support from their 10-day and 50-day trendlines.

Historically, the social gaming guru has exceeded analysts' per-share profit projections in three of the past four quarters, according to Thomson Reuters.


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