Facebook Inc (FB) $27.38 +4.07%

| June 8, 2012 | 0 Comments More

Facebook (FB) options are seeing heavy volume this morning, with more than 100K contracts trading in the first hour, putting the product on track for a potential new record over 400K contracts. The stock is up 4 percent and the order flow appears directionally bullish.

The activity includes a large ratio call spread trading in which a customer bought 10,000 June 29 calls to sell 20,000 June 31 calls for a 17.5 cent debit. The spread seems to be a short-term bet on a move to $31, or 13.2 percent advance through the end of next week. At $31, the 29 calls are worth $2 and and the $31 calls expire worthless. The debit is at risk if FB holds below $29 and the position is left open through the expiration. There is additional risk to the upside, because not all of the 31 calls (which are sold) are covered by the 29 calls, that were bought.

Since options were listed on May 29th, more than 2 million contracts have traded and open interest is grown to 915,000 contracts, with nearly 50% of the open interest in the June and July terms. There is very little OI in the longer-term contracts and that might reflect the uncertainty that investors face related to the longer-term outlook for the company’s earnings and share price.

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Category: All Stocks, Large Cap Stocks, Software & Computer Services

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Henry Schwartz is the president of Trade Alert LLC, a provider of real-time options analysis tools to leading Wall Street firms. His systems analyze hundreds of thousands of transactions per second to help professionals identify and interpret market activity in real time, supporting informed trading decisions and intelligent idea generation. He has held institutional trading and management roles with Bank of America, Bear Stearns, Salomon Brothers and the Hull Group, and made markets on the CBOE and AMEX floors in the US, and EUREX and MONEP overseas. Prior to founding Trade Alert, he led the electronic market-making group at Bank of America coincident with the launch of the International Securities Exchange. He received his bachelor’s degree in Economics from the University of California, San Diego and his MBA from NYU’s Stern School of Business.

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