Plunge in Facebook Stock Unleashes Near Record Trading of Options
March 21 2018 - 2:10PM
Dow Jones News
By Gunjan Banerji
The tumble in Facebook Inc.'s shares has triggered frenzied
trading of the company's options, including contracts that pay out
if the stock falls more than 30% or regains most of its losses.
The social-media giant is trading at $172.72 a share Wednesday
afternoon, but has slumped more than 6% so far this week after
reports that a firm tied to President Donald Trump's 2016 campaign
called Cambridge Analytica gathered user data without
authorization.
On Tuesday, volume of Facebook options was the second busiest
ever, according to data provider Trade Alert. And some investors
appeared to be girding for a violent move in the stock.
Among the most popular options changing hands Tuesday were
bearish put contracts expiring in April. Puts give holders the
right but not the obligation to sell the shares at a certain price.
Traders can tap options to make bets on which direction they think
a stock will move or to hedge portfolios.
The "strike prices" for the options -- the levels at which the
contracts can be exercised -- were $115 and $120. That means
Facebook shares would have to plunge 32% or 29%, respectively, from
where they closed Tuesday for the options to pay out. Facebook
shares haven't traded at those levels since around December
2016.
"They're most likely purchasing puts to protect themselves on
the downside," said Mary Ryan, a Chicago-based senior options
strategist at E*Trade Financial Corp. But some options investors
may be positioning for a reversal, she said.
The reports linked to Cambridge Analytica have sent Facebook
shares on their worst two-day streak in more than two years, a
sharp reversal for the company, which has vastly outperformed the
S&P 500 in recent years.
Also popular among Facebook options were bullish call options
that pay out if the stock bounces back to above $180, near where
the stock was trading before this week, Trade Alert data show.
JPMorgan Chase & Co. analysts recommended a bullish options
trade in a note Wednesday.
"Clarity on the Cambridge issue and Facebook's willingness to
self-regulate are likely near-term catalysts that may reduce
investor fears, stabilize the stock and position it for a recovery
into first-quarter results," JPMorgan analysts wrote.
Facebook options tend to be heavily traded, landing it on a list
of the top 10 most-active options in 2017, alongside contracts on
the S&P 500 and Apple, according to a January report from
research firm Tabb Group.
There could be more prices swings ahead, according to JJ
Kinahan, chief market strategist at TD Ameritrade.
"I would expect the activity to stay elevated for the next few
weeks with bouts of intraday volatility," Mr. Kinahan said by
email.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
March 21, 2018 13:55 ET (17:55 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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