(Reuters) – A sharp decline in Facebook Inc shares has investors scrambling for options to hedge against further weakness in the company’s struggling stock.
|Payday Loans: Borrow up to £1000
Up to £1000 in 60 minutes at no extra
cost. All from the privacy of home
|Bad Credit Loans
Quick payday loans. Borrow up to £1000 online. Repay on your payday!
Volume on Facebook options soared on their first trading day on Tuesday as the underlying stock plunged below $29 a share for the first time, down more than 23 percent from its initial public offering price of $38.
The busiest options contract on Facebook was June $30 strike puts, with more than 18,241 contracts on the tape at an average price of $1.45 per contract, according to Trade Alert.
“The majority of the participants have been selling calls and buying puts in Facebook,” said Steve Place, a founder of options analytics firm investingwithoptions.com.
Shares were hit hard on Tuesday, losing 9.7 percent to $28.78, an all-time low in the short trading history of the social network. Facebook went public with much fanfare more than a week ago, but its first trading day, May 18, was marred by technological problems on the Nasdaq Stock Exchange and the shares have been sliding ever since.
As Facebook shares dipped below $30 in afternoon trade, buying picked up in the August $29 strike puts.
Put options, generally considered bearish bets, give the holder the right to sell shares at a specific price by a certain date, while calls, generally considered bullish bets, give the holder the right to buy shares at a specific price.
Options volume on Facebook exceeded 200,000 contracts by afternoon trade with 132,000 puts and 94,000 calls, for a put-to-call ratio of 1.41, according to data by options analytics firm Trade Alert. The overall volume is the highest after Apple Inc.
“Current volume implies Facebook may hit 400,000 contracts today, making it the best first-day listing in listed options history,” said Henry Schwartz, president of Trade Alert.
EASIER TO BORROW
The volume of Facebook’s securities on loan fell to about 40 million on Tuesday, down from a peak of 59 million shares on Sunday, cutting the cost of borrowing to about 1 percent. That is an additional reduction by about 50 percent from Friday’s level, according to Tim Smith, executive vice president of Astec Analytics, a division of Sungard Financial Systems, in New York.
“Until the borrow rate gets to be as easy as Apple Inc, Facebook puts will be priced more expensive than calls, all else being equal,” said Enis Taner, global macro editor at option trading website RiskReversal.com.
Implied volatility on Facebook’s at-the-money options was 60 percent to 63 percent, according to Trade Alert. In contrast, implied volatility on LinkedIn’s at-the-money options was 61.5 percent while Groupon was 85.5 percent. Implied volatility, a key component of an options price, measures the perceived risk of future share price movement.
NYSE Amex Options, owned by exchange operator NYSE Euronext, is the designated primary market for Facebook options.
(Reporting by Angela Moon and Doris Frankel; Editing by John Wallace and Steve Orlofsky)
Powered by Facebook Comments