Facebook Inc (NASDAQ:FB - 33.05) is up about 30% from its June 6 nadir of $25.52, but long-term option speculators feel the downward pressure on the social networking giant is far from relieved. In fact, they are betting FB will take out this all-time low -- maybe not today, maybe not tomorrow, but at least within the next 18 months.
FB has been a notable favorite among speculative traders ever since it became an optionable stock in late May. On Friday, option volume ran about 55% ahead of the usual pace, with 342,000 contracts changing hands versus average daily option volume of 220,000 contracts. This morning, 119,000 of these contracts were added as new open interest -- 38,000 on the call side and 81,000 puts.
One notable strike in Friday's trading was the January 2014 25-strike put. These out-of-the-money LEAPS saw volume of 19,000 contracts, 99% of which translated as new open interest this morning and 100% of which traded at the ask price, signifying the options were being bought to open.
These long-term puts traded for an average price of $4.67 per contract, making the at-expiration breakeven price $20.33, or 38% below current levels. Long put buyers can lose 100% of the premium paid but have unlimited profit potential down to zero, should the underlying fall below the breakeven price. Like all American-style equity options, however, long puts do not need to be held all the way through expiration; a drop in FB stock price or a jump in implied volatility could provide an exit point long before the options cease to exist.
Although FB has been in recovery mode for the past two-and-a-half weeks, option traders have become slightly more interested in bearishly slanted puts. In the past 10 trading days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the put/call volume ratio stands at 1.54, meaning slightly more than 1.5 puts have been bought to open for every call. In the past 20 days, this volume ratio is not quite as put-heavy, weighing in at 1.42.
This trend indicates that option traders are not buying into the FB rally (which has taken the stock back above its 10-day moving average on the charts) but are instead continuing to hedge with long puts.http://www.schaeffersresearch.com/marketcenters/...ult.aspx?ID=111663