Game Not Over on Zynga?

Focus: OPTIONS

With its dismal post-IPO performance and announcement of a pending “divorce” from Facebook, many have been speculating whether it’s game over for Zynga. Not so fast, writes Teri Stridsberg of Schaeffer’s Investment Research.

Zynga Inc. (ZNGA) rallied more than 7% on Wednesday, amid reports the company plans to launch its latest casino game offering, Elite Slots, on Facebook Inc. (FB). As such, approximately 45,000 calls had changed hands by the time the closing bell rang, which was more than double the equity's average daily call volume, and 13 times the number of puts traded.

The clear front-runner was the December 2.50 call, where nearly 10,900 contracts crossed the tape—the majority of them at the ask price, pointing to buyer-driven activity. These calls were exchanged at a volume-weighted average price (VWAP) of $0.15. Open interest at this strike rose by almost 3,400 contracts overnight, indicating that some of the volume consisted of new positions. This option now holds peak call open interest of 32,689 contracts. In order for traders to realize a profit on these bought-to-open calls, the stock must rise above $2.65 by front-month expiration.

This preference for calls over puts is nothing new for ZNGA. The equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio sits at 7.46, confirming calls bought to open have outnumbered puts by a margin of more than seven to one during the past two weeks.