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Zynga Speculators Heat Up the Option Pits

The March 2.5 put and weekly 2.5 call are active in today's trading

by 1/28/2013 2:11 PM
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Zynga Inc (NASDAQ:ZNGA - 2.68) options pits are a busy place today, as speculators try to chart the beaten-down Wall Street freshman's next move. Roughly 35,000 calls and 13,000 puts have changed hands, both almost tripling the average intraday volume for ZNGA.

One notable option is the 2/1 2.5-strike call, where volume has exceeded open interest, and roughly two-thirds of the more than 5,600 contracts changing hands have traded at the ask price. The volume-weighted average price (VWAP) for this weekly option is $0.12, meaning the shares need to be perched north of $2.62 (strike plus VWAP) at Friday's close for these bullish speculators to be profitable. Given the stock is currently above the strike level, delta is relatively elevated, at 82% (up from 49% on Friday). In other words, the options market currently believes there is an 82% chance ZNGA will be trading above the 2.5 strike when the options expire this Friday.

On the other side of the fence is the March 2.5 put, where nearly 3,500 contracts have traded, mostly at the ask price. Implied volatility is up 7.3 percentage points, indicating some of this volume consists of buy-to-open orders. With a VWAP of $0.18, breakeven for this strategy is $2.32, or the put strike less the VWAP. This represents a drop of more than 13% from current levels. Delta for this particular option, for the sake of comparison, is negative 34, giving the option roughly 1-in-3 odds of an in-the-money finish.

Given the low dollar value of ZNGA, it's no shock that call options have been the more popular choice of late (there simply aren't that many viable put strikes to work with). Still, bullish speculation has been even more prevalent than usual. In the last 50 trading days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), 883 calls have been bought to open for every 100 puts. This ratio is higher than 96% of the past year's readings, signifying call-buying activity is nearing an annual peak.

Turning to technicals, ZNGA has been trying to stage a rally in recent weeks and is up nearly 13% in 2013 (today's bump of more than 7.5% has certainly contributed). In fact, the stock has now muscled north of its 20-week moving average, which has been stifling the shares for the past few months. From the glass-half-empty perspective, however, the shares are still down about 83% from their early March peak of $15.91. Analysts seem to be focused on this broader picture, as evidenced by the 16 "hold" or worse ratings, compared to just one "strong buy" and a single "buy" rating.

Meanwhile, the company is headed under the earnings spotlight next Tuesday after the close, and analysts are projecting per-share losses of 3 cents. Today's weekly call buyers will be out of the game by then, but put buyers could be hoping for an earnings-related drubbing, such as what the stock endured in late July. Following its last announcement on Oct. 24, however, the shares actually moved higher the subsequent session.


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