Options Traders Frown Upon Facebook

by Chris Johnson | May 29, 2012 4:39 pm

Facebook (NASDAQ:FB[1]) options started trading for the first time on Tuesday, a little more than a week after the much-awaited IPO of the social networking giant, but from what it appears so far, options traders aren’t “liking” the stock.

As of 1 p.m., options on FB were seeing some healthy put volume, especially on the near-the-money strikes of $30 and $29. The combined June expiration volume at these strikes is currently trading at ratio of 2.2-to-1 (down from 3.3-to-1 earlier today), favoring the puts. That ratio indicates that investors are purchasing more than two puts for every one call of the stock — a sign that sentiment toward FB remains tilted to the pessimistic side of the market.

While the near-term outlook remains less than optimistic thanks to the botched IPO, there is some potential for the options activity to begin stabilizing the underlying share prices. It is our experience that heavy put volume and open interest often eventually serves to help stabilize downside pressure. For this reason, we’re eying the put activity at the $30 and $29 levels closely, as it is more likely to help to start building some short-term support for shares.

Currently, FB options are trading with an implied volatility of around 60, around double the implieds of Apple (NASDAQ:AAPL[2]), which currently are around 30.

Comparing the FB implieds to companies in the same “space,” Zynga (NASDAQ:ZNGA[3]) options currently are trading with implied volatilities around 94, while LinkedIn (NYSE:LNKD[4]) options are fetching implieds of around 60 — very similar to FB options.

This data suggests that FB options might not be overvalued and a fair alternative for those looking to take positions on the spotlight stock.

FacebookOptions Options Traders Frown Upon Facebook

Given the pessimism broadcast by the options activity and recent overwhelming selling of the shares, any small improvement in the outlook could shift the herd of Facebook sellers into buyers as the stock could suddenly shift from overhyped to an oversold opportunity.

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

Endnotes:
  1. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  2. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  3. ZNGA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZNGA
  4. LNKD: http://studio-5.financialcontent.com/investplace/quote?Symbol=LNKD

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