Wednesday, May 30, 2012

A Look at Options on Facebook Common (FB)

Sometime headline writing is challenging.
If I had gone with a simple "Facebook Options" folks might think we were talking about the Facebook phone or the Facebook browser, charging for Facebook in New Zealand or Zuckerberg's $0.00 tip on a $40 tab.

So I ask myself  "What would Henry Blodget do?" and  instead I use a clumsy locution to avoid a bait-and-switch.
In pre-market action the stock is down a few pennies at $28.77.
First up, Barron's:

Bears Draw Blood on Facebook's First Options Trading Day
As the stock for the first time dipped below $30 midday Tuesday, options investors are betting it can fall further.
Facebook's stock now has something in common with Mark Zuckerberg, the company's founder.
Both are under 30.

And it appears that option investors think that the stock can sink further.
Almost from the moment the options on Facebook began trading for the first time Tuesday morning, investors actively bought puts that would increase in value should Facebook (ticker: FB) fall below $30, which it did by noon.

Scores of likely scorned stock investors bought puts that were at, or just below, $30, which they financed by selling bullish calls. In essence, the sophisticated strategy offers one of the first signs from Wall Street that Facebook's botched stock offering has painted a target on Facebook's stock that bearish traders want to fire away at.

In the New York Stock Exchange's options market, for example, the day's first trade entailed selling 743 June 32 calls, and selling 743 June 30 puts. The strategy -- a short strangle -- indicates that a sophisticated investor believes Facebook's stock will remain under significant short-term pressure and slip below $30.
At 28, which also happens to be Zuckerberg's age, the strangle seller indicated he would buy the stock. At that price, Facebook's stock would be 26% below the $38 price the stock was priced at for its initial public offering.

The bulk of Facebook's trading action is occurring in options that expire in June and July, which telegraphs another important message to stock investors from the options market. No one is willing to make a long-term bets on the stock even though they can buy or sell Facebook options that expire in January 2014.
By focusing on options that expire by July 20, investors are expressing a view that they do not have any confidence pricing Facebook's stock....MORE
And from Option Pit:
A Breakdown of the New Facebook Options
I promise this will be one of the only Facebook options posts I put up over the next few weeks.  However, I wanted to make sure that I pointed out a few interesting tidbits about options on facebook that, maybe, the average retail trader might not have noticed.  Stuff everyone should know before reading the rest of this piece:

Facebook options started at an implied volatility below 60% this morning, while the realized volatility has been closer to 100% in its first week of trading.  What does that say about facebook?  Not much.  The stock is so new, and has been beaten down on its open, that we really don’t know what the volatility will be.  My guess though,  the stock is going to slow down its free fall, and the volatility will settle in closer to GOOG levels (around 30%)  than to ZNGA levels (near 85%).

The stock is also hard to borrow right now.  While that was likely more of a problem with the stock at 33 than 29, as long as the borrow is hard, the stock will have problems.  Keep an eye on that.  I think the HTB tag goes away around 26-28 dollars a share as the easy money leaves.

In terms of skew:
Livevol (r)

As one might expect, the skew is a standard investment skew, with puts seemingly expensive due to the rate of decline.  On the other hand, calls seems pretty flat (this could set up well for a bullish fly if/when the stock gets a bounce).  It also sets up well for front spreads.

Finally, and most interesting is the term structure.

Livevol (r)

Notice that June is super bid while July is much cheaper.  This implies that there is high demand for gamma in the near term.  August is over July as well, as that is an earnings month....MORE