A Pair of Strategies for Nasdaq OMX’s Botched Facebook IPO

by Joseph Hargett | May 22, 2012 8:25 am

Bats Global Markets was the first to botch an initial public offering[1] this year, but Nasdaq OMX Group (NASDAQ:NDAQ[2]) made sure last week that the bourse’s flub would be but a historical footnote.

Overwhelmed by a dearth of order cancellations and updates, Nasdaq’s computer system delayed Facebook‘s (NASDAQ:FB[3]) IPO by half an hour[4]. In other words, the Street’s most technologically advanced bourse faceplanted on what CEO Robert Greifeld dubbed the “biggest IPO cross in the history of mankind.”

Investors clearly were not pleased with the failure, sending NDAQ shares 4.4% lower on Friday, with the stock ending the week at $21.99. Furthermore, options traders flooded NDAQ with a wave of put volume, with more than 13,000 of these typically bearish bets swamping the stock’s average daily put volume of just 190 contracts.

The June 20 strike was the most heavily traded, with open interest spiking from just 15 contracts at the close on Thursday to 2,486 contracts by the open on Monday. According to data from Trade Alert, some 90% of these puts were bought to open, meaning that NDAQ was inundated with a wealth of new long put positions on Friday.

The preference for puts spilled over into Monday’s activity as well, with put volume reaching 4,364 contracts, versus call volume of 2,008 contracts. The result was a single-session put/call volume ratio of 2.17, with put volume more than doubling call volume yesterday. Once again, the June 20 strike was the most popular, raking in volume of 1,411 contracts, while the June 21 and 22 strikes each saw more than 900 puts change hands.

Technically, Monday’s put activity was troubling because it took place despite a 3.6% rebound in NDAQ shares. Before we naysay these bears for attempting to “catch a falling knife,” it is important to note that NDAQ currently is staring up at an area of long-term chart congestion between $23 and $24. This region also is home to a 50% retracement of the stock’s 52-week high ($27.34) and low ($20.32), and could create considerable headwinds for the shares going forward.

On the flip side, NDAQ has shed more than 7.5% since the start of 2012, placing the stock’s 14-day RSI in oversold territory. Additionally, the shares have potential round-number support at the $20 level. These two factors could attract bargain hunters, at least in the short term.

This backdrop opens NDAQ up to two potentially lucrative options trading strategies.

For those traders looking to follow the bearish crowd, a July 23/20 bearish put spread could take advantage of additional fallout surrounding the company’s botch of the Facebook IPO.

This trade was offered at $1.05, or $105 per pair of contracts, at the close of trading on Monday. Breakeven lies at $21.95 — a 3.7% decline from Monday’s close — while a maximum profit of $1.95, or $195 per pair of contracts, could be reached if NDAQ closes at or below $20 when July options expire.

For traders looking to jump on the stock’s short-term activity, a pseudo-contrarian approach might be prudent. I say “pseudo contrarian” because a bull put spread is more neutral than bullish in terms of the underlying shares’ direction. Specifically, the June 20/19 bull put spread would allow a trader to realize a profit should support near $20 hold firm.

This trade was offered at 15 cents, or $15 per pair of contracts, at the close of trading on Monday. The maximum profit is capped at the initial credit of 15 cents, while a maximum loss of 85 cents is possible if NDAQ closes at or below $19 when June options expire. Traders could hold off on entering this trade until NDAQ pulls back from current levels, thus conceivably improving the initial credit received.

As of this writing, Joseph Hargett did not hold an open position in any of the aforementioned securities or options, nor does he have plans to enter such a position in the next 72 hours.

Endnotes:
  1. botch an initial public offering: http://investorplace.com/ipo-playbook/bats-ipo-blows-up-and-shakes-up-apple/
  2. NDAQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=NDAQ
  3. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  4. by half an hour: http://investorplace.com/ipo-playbook/facebook-ipo-arrives-fb-starts-up-12/

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