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The shares of Zynga Inc (NASDAQ:ZNGA - 2.23) followed the broader equities market into the red on Monday, ending beneath their 10- and 20-day trendlines for the first time since Nov. 14. Nevertheless, a handful of option traders remain optimistic, as evidenced by yesterday's affinity for short-term calls.
By the time the dust settled, beleaguered ZNGA had seen roughly 31,000 calls change hands -- about twice its average daily call volume, and nearly double the number of ZNGA puts exchanged. Attracting the most attention was the January 2.50 call, which saw nearly 11,000 contracts change hands. The majority of the calls crossed at the ask price, and call open interest at the back-month strike soared overnight, pointing to buy-to-open activity.
By purchasing the calls to open, the buyers are gambling on a short-term rebound for ZNGA, which has shed more than three-quarters of its value in 2012. More specifically, the volume-weighted average price (VWAP) of the calls was $0.17, meaning the buyers will reap a reward if ZNGA bounces back atop the $2.67 level (strike plus average premium paid) by January options expiration. However, even if ZNGA extends its recent slump, the most the buyers can lose is the initial premium paid for the calls.
As we mentioned last week, ZNGA is no stranger to optimism in the options pits. During the past two weeks, speculators have bought to open nearly 15 calls for every put on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Plus, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.56 indicates that calls nearly double their put rivals among options expiring within three months. Again, though, considering ZNGA is trading in the low single digits, there's little downside potential for put players.
Ahead of the bell, ZNGA is pointed about 3% higher.