Facebook shares plunge on options action

The stock opened for options trading Tuesday, and the bearish response helped shares fall below $29 for the first time.

By Kim Peterson May 29, 2012 5:59PM
Facebook (FB) shares plunged nearly 10% Tuesday on the absence of any real news and fell below $29 a share for the first time. Why did the stock get whacked?

The answer is in the options market, where Facebook made its debut Tuesday. Options traders make all kinds of bets on the future of a stock, and if they make the right combination of guesses, they get paid very handsomely. If they bet wrong -- which does happen the majority of the time -- they lose some money, but it's often less risky than buying the stock outright.

Options trading can get pretty complicated under different strategies. People are trading the right to buy and sell shares of stock at different price levels, and use a number of scenarios depending on the circumstances.

So what did options traders think about Facebook, which has fallen 24% from its IPO price to close Tuesday at $28.84? Here are a few messages the options market sent out Tuesday:

1. This is a short-term play. You could buy options that don't expire until January 2014 -- but few traders wanted to stick around for that long. Some did make bets that Facebook would hit $65 a share by January 2014, however.

But most traders were in for a short-term hit. The largest option trades bet that the stock would slide to $25 by mid-July, The Wall Street Journal reported.

2. Traders were bearish. Most traders were selling call options to finance put options in Facebook, Reuters reported. Selling call options grants another investor the right to buy your Facebook shares at a strike price. Buying put options gives you the right to sell your Facebook shares at a strike price.

In the first Facebook trade of the day in the New York Stock Exchange's options market, an investor sold 743 calls at a $32 strike price expiring in June, and at the same time bought 743 puts at a $30 strike price expiring in June, Barron's reports. The strategy, called a "short strangle," shows that the investor thinks Facebook shares will fall below $30 by mid-June.

That investor made a pretty good bet. After opening Tuesday at $31.48, Facebook shares fell by nearly 10% by the close. So anyone who bought a June $30 put can sell those shares at $30 a share before the option expires in June, and as of Tuesday's close they were making a profit.

Of the top 10 busiest Facebook options, seven were puts, The Globe and Mail reports.

3. Uncertainty about the stock's real value. The underlying message Tuesday was that Facebook stock is not a sure thing by any means. Traders were worried, and many just wanted to get in and out quickly. Some investors sold their Facebook shares Tuesday to start trading options -- which at this point looks like a better bet.

Facebook's next quarterly earnings announcement is expected around July 25, and traders tended to stay away from betting what the stock would do at that point. That's why most of the options trades centered on June and July, not on August and beyond.

"By focusing on options that expire by July 20, investors are expressing a view that they do not have any confidence pricing Facebook's stock," wrote Steven Sears at Barron's.

4. The stock could go lower. "If there are more puts being bought and calls being sold, then traders will sell more stock to hedge their position, forcing the stock to go lower," wrote options trading site KeeneOnTheMarket.

Read more about Facebook

Tags: FB
64Comments
May 29, 2012 9:45PM
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Facebook is an intrusive tool for people with way, way too much time on their hands.  No more letters, no more prose, no more poetry, no more thoughtfulness, just the latest fulminating burp of infonothingness.  So I am quite pleased that this overrated business is crashing.  Justice would be a stock no more than 5-10 dollars a share at best, given the problematic business model.
May 29, 2012 11:33PM
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Never invest in a company that relies upon the loyalty of 14 year old girls. The minute the kids decide it's not cool anymore, Buh-Bye.
May 29, 2012 9:28PM
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Face book has no capital assets. If I want to buy air I'll put a quarter in the air compresser at the gas station. At leas then I can get compressed air for my tires.

May 30, 2012 2:05AM
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I commented before the IPO, 1, they dont make anything of value 2, the revenue stream is uncertain/unknown.

FB could be gone in 6 months, Those who planned this made their dollars already and if it tanks it is ok by them. I can't believe people fell for this old trick.

 

May 30, 2012 12:23AM
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They don't make anything or build anything. Remind me what it is they do again?
May 29, 2012 10:55PM
May 29, 2012 10:00PM
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I'm sorry but facebook is an inanimate object with value coming from hype (with a little profit). Facebook reminds me of MySpace in that no one thought MySpace would ever go away....until FB appeared. Will FB be the next MySpace? How do you get people to look at ads when all they want is to chat or write something on a wall? I see this stock at $11...or about 33 P/E...My opinion!!
May 30, 2012 12:34AM
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Facebook got whacked because:

(A) It is a business platform based on a fad and the ephemeral, rapidly changing tastes of its main target demographic.  This demographic does not click through ads or purchase the products advertised thereon---e.g. GM.  FB is like a movie set.  Peek behind the facade and see what is propping it up and how fragile that is.

(B) The small investor has been suckered enough by Wall St and banksters.  We get it---we aren't permitted to profit from IPOs.  These events are hyped beyond belief by a complicit, paid-for media and are typically losers for all but the insiders.

(C) Even a few of the smarter institutional funds figured it out.  How much FB did Berkshire Hathaway buy?  Zilch, nada, zero.  Buffett wouldn't touch it.  He also said he would not buy Apple or Google.  The difference is he said he would not short Apple or Google.  Nothing about FB.  So, the question is, how much is he going to make shorting FB?

Look for the stock to be trading under $15, and possibly under $10/share by the end of the year.

Also, look for the next great thing (which all the kids are already waiting for) to suck the life out of FB.  Its worth will be defined by the residual, limited shelf life value of the data it has mined from the gullible for marketing purposes.  Most kids (13-30) will tell you, "FB is over."

May 29, 2012 9:32PM
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Always beware then the news media hypes up an investment, like they did here with FB, like they did with Myspace, like they did with Enron...
May 29, 2012 7:17PM
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Don't worry Facebook owners. Technical analysis shows there is price support at $0.00, although it could go lower in the short term.

 

May 29, 2012 11:13PM
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Facebook is like trolling a sewer line.
Enjoy your honeymoon, Schmuckenberg. 

May 29, 2012 7:08PM
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will someone please just call Facecrook what it really is already, JUNKBOOK!

May 29, 2012 10:24PM
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Over the past couple of years I've had friends disparagingly refer to FB as "FakeBook", with the pages of the non-existent people and aliases that are used in the FB pages.  I even use the "FakeBook" term myself.

 

Well, it looks like that term is becoming a prophecy!

 

I don't use FB, and have issues with its personal information gathering scheme, in the guise of it being in a benevolent light.  I'm always suspicious of companies that use the "benevolency" aspect with promoting itself.

May 29, 2012 8:27PM
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Never put your Money where it's Volatile.

That is the STOCK MARKET ..it's for the Super Wealthy.

They play a great game ... get the Little guy SUCKERED IN and then Crush You

and take your Money.

 So stay away from WALL STREET ... it's All a Scam !

 

You have a better chance at Winning the Lottery or at some Casino to make it rich for your

Retirement Days.

 

Also never depend or rely or Trust a CEO " Crooked Elected Official "

May 29, 2012 10:54PM
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I don't want to screw up my karma here, but I have some thoughts about facebook that are 'questionable' to say the least.  A.  Do we (and do we have the right) think that Mark Zuckerberg deserves the credit and richness this has brought him?  B.  repeat A.   
May 29, 2012 9:30PM
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I getting ready to hear our government bailing FB out - then I'm gonna puke!!!

May 29, 2012 7:32PM
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I still do not understand how anything Facebook is news worthy. Past, Present, or Future. 
May 29, 2012 6:40PM
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Does "Fadebook" come to mind as I can hardly wait for the next big fad....
May 29, 2012 8:53PM
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I would not give ya a plugged nickle for a truckload of the stock LOL !
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