Plunge in Facebook Stock Unleashes Near Record Trading of Options

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 [e-mail]

(END) Dow Jones Newswires

March 21, 2018 13:55 ET (17:55 GMT)

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