How Options on Facebook Could Help Boost the Stock

by Rick Pendergraft | May 30, 2012 8:21 am

How Options on Facebook Could Help Boost the Stock

The Facebook (NASDAQ:FB[1]) IPO[2] has been a huge disappointment to say the least. Individual investors are disappointed, and some are filing lawsuits[3] after what they believe was an unfair advantage for institutional investors.

Personally, I feel investors are whining because they expected to make a ton of money on the IPO, and when it didn’t happen, they were looking for someone or something to blame. Let’s face it, they bought into an investment with no guarantees. Because it was one of the most hyped IPOs in history, the investors that were able to get in expected to make a ton of money in a short period of time — when that didn’t happen, they wanted somebody to pay.

My personal feeling is — tough. I have made so many recommendations and investments over the years that I felt had a great chance to make a lot of money and been disappointed many times too. But I have yet to file a lawsuit because things didn’t work out like I expected.

Regardless of how I feel about the Facebook IPO — or how anyone else feels, for that matter — there could be something positive happening for Facebook shareholders. Yesterday, options were introduced for FB[4] … and judging by the initial trading, we could see the stock settling down a little in the near future.

On the first day of options trading, there were 78,055 June calls traded and 87,713 puts traded. For the July options, there were 48,197 puts traded compared to 24,686 calls. If we combine these front two months of options, it gives us a put/call ratio of 1.32.

While there isn’t any history to which we can compare this put/call ratio, it is unusual to see such a high ratio on a new issue. This suggests pessimism toward FB is rather high. From a contrarian viewpoint, this is a good sign that things might be getting carried away with the selling. You also should keep in mind that these figures came on a day when the stock dropped almost 10%, so there was a definite bearish bias in the options pit.

Another thing that happened with the options trading is that some potential options-related support levels were established. Historically with options trading, support and resistance levels can be created if there is a large discrepancy in open interest at a certain strike. Let me explain. With FB, the June 28 strike put saw 14,393 contracts change hands. The June 28 call only saw 3,153 contracts change hands. This is a ratio of 4.5 puts for every call. If this trading volume should translate into accurate open interest figures, we could see the $28 level acting as support until the June options expire on June 15.

On the flip side, the June 32 strike saw similar numbers in reverse. There were 15,091 calls traded at the strike with only 3,513 puts traded. Should the stock start to rise, we could see the $33 level acting as resistance based on the discrepancy between calls and puts. At this point, I think some shareholders would be happy if the stock rallied to $33 between now and June 15.

Yesterday was only the first day of options trading, and I didn’t even have the open interest figures when I wrote this article. But watching what happens with the options open interest in the next few days could give you some support and resistance levels to watch on Facebook. When you have a new issue without a historical chart to look at, the options can give you some support and resistance levels to work with.

Keep an eye on the options activity in the coming days to see where the open interest builds up.

As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.

Endnotes:
  1. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  2. IPO: http://investorplace.com/hot-topics/facebook/
  3. some are filing lawsuits: http://investorplace.com/2012/05/regulators-turning-up-the-heat-on-facebooks-ipo-fb-ms/
  4. options were introduced for FB: http://investorplace.com/2012/05/options-traders-frown-upon-facebook/

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