Recent IPO Facebook (FB), the richest tech offering in history and one which immediately saw “investors pulling out” due to secretive valuation concerns amongst other well-lauded problems, is seeing a secondary IPO of sorts Tuesday. In just its seventh session of listing on the NASDAQ, “investors are now playing options” in very active trading with volume already topping 150,000 contracts.
Investors looking to trade or hedge Facebook with options have the luxury of immediate liquidity provision in near months with spreads trading $0.05 to $0.10 wide in June and July, roughly $0.10 to $0.20 between the bid and offer in mid-term options and a less tempting $0.30 to $0.50 for the likes of March 2013 and January 2014.
Most active so far, the June 30 put has put together volume of 20,500. Priced at $2.40 with shares at 28.80; the option is currently an even blend of intrinsic and extrinsic premium, maintains an expiration breakeven of 27.60 and double value down at 25.20 for a straight up / naked long put buyer.
Strikes are currently available ranging from 19 to 50 in non-LEAPs and spaced one point apart, while January 2014 has a mix of two, three and five point increments from a low of 5 to a high of 65. And with today’s initial show of support from traders, we suspect it’s only going to get better for option traders with Weeklys due later this week and penny increments surely not too far behind.
Tuesday’s strong liquidity factor is largely unsurprising of course given Facebook’s high profile status and shares seeing stunning volume of nearly 600 million its first day and continuing to show plenty of spunk thereafter with the lowest activity amounting to a still very impressive 39 million shares.
Implied volatility for at-the-money’s is priced around 66% for near-term months and works its way lower to the low to mid 50s for January 2014. Based on implieds of 66%, traders are estimating a 68% chance FB shares will remain within roughly 14% of its current price near $29 during the life of the June contract.
A cap of 14% on movement in either direction translates to a range of about $25 to $33 in shares. In our view the pricing seems a bit low given roughly 3.25% to 11.00% on a close-to-close basis and which doesn’t even consider the more volatile intraday movement.
As mentioned, further out contracts sport even lower implieds, but they’re still a bit wide (loose) in their pricing for serious consideration, particularly for spread opportunities. Also, the implieds are showing a skew favoring puts and indicative of the potential for shares to become hard-to-borrow and possibly exposing short-sellers to the risk of getting called in.
Finally, with just a very brief price history of how shares will ultimately trade, the potential for human error with regards to volatility, for better and worse of course, is reduced with the near-term contracts. Vega or the volatility risk of a contract poses less of a threat per point than the longer-term contracts. That all said, if you’re going to friend Facebook as a bull, bear or hedgehog, we'd suggest not starting a long-term relationship just yet.
Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
