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Zynga (ZNGA) Optimists Forecast Further Gains by Spring

Bullish speculators eye ZNGA's April calls

by 2/13/2013 12:55 PM
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Traders have been upping the bullish ante on Zynga Inc (NASDAQ:ZNGA - 3.23) lately, according to the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In fact, the security sports a 50-day call/put volume ratio of 5.89, indicating calls bought to open have outnumbered puts by a margin of nearly 6-to-1 during the past few months. This ratio is just 10 percentage points shy of an annual high, meaning traders have rarely picked up calls over puts at a faster pace.

Today's options activity reflects more of the same, as ZNGA has seen approximately 32,000 calls cross the tape so far. This marks a 24% increase over the norm, and is nearly four times the number of puts exchanged. Basking in the limelight is the April 3.50 call, where north of 8,500 contracts have traded at a volume-weighted average price (VWAP) of $0.38.

Digging deeper into the data, it appears that 90% of these calls changed hands at the ask price, signaling they were bought. Meanwhile, this option holds open interest of just over 6,700 contracts, suggesting that at least some of today's volume is comprised of fresh bullish bets. By purchasing these calls to open, speculators are counting on ZNGA to muscle north of $3.88 (strike price plus the VWAP) by April expiration. This denotes an 20.1% increase over current levels.

This optimism certainly isn't unwarranted, given the stock's year-to-date climb of around 37%. What's more, ZNGA gained roughly 29% during the week of Feb. 3 alone, thanks to a stronger-than-anticipated quarterly earnings report, as well as news that Internet gambling could soon be legal in New Jersey -- a development that would benefit the online game guru.

Also of note, the delta for the aforementioned April call checks in at 47, giving the option a near 1-in-2 chance of finishing in the money. However, even if the shares fail to surpass the previously noted breakeven rail, today's bulls have only risked the premium forked over for their call purchases.


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