Zynga Speculators: Boost Gains For A Small Fee

Aug. 6.12 | About: Zynga (ZNGA)

This strategy not only provides you with the opportunity to leverage your position in Zynga Inc, (ZNGA), but it also provides one with the chance to get into the stock at a much lower price. However, this is a speculative play and only individuals willing to take on extra risk should consider this play. Only employ this technique if you are bullish on the stock and willing to take on some extra risk. If you are not bullish on the stock, and or not willing to take on more risk, then do not put this strategy to use.

Suggested strategy for Zynga Inc:

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After topping at 15.91 in March 2012, the stock has done nothing but trend downwards. Currently, it is trading over 80% below its March 2012 highs. Recently it gapped down from the $5 ranges to the $3.00 ranges as indicated in the chart above. It is trying to put in a base and as long as it does not close below 2.50 on a weekly basis the outlook will remain neutral. A stock that has taken such beating usually tends to mount a pretty decent relief rally. Thus there is a decent chance that it could fill the gap and trade to the 4.50-5.00 ranges before resuming its down trend. Once again, this play should only be undertaken by those willing to take on an extra risk. A weekly close above 5.20 would turn the short- midterm outlook to bullish.

This play has two parts to it. The first part entails selling a put and in the second part calls are purchased with the proceeds from part 1.

Part 1

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The Dec 2012 2.50 puts are trading $0.35-$0.38 ranges. Put in orders to sell these puts at 36 cents or better. For each contract sold $36 will be deposited into you account. The money received from the sales of the puts will be used to complete the second part of the trade.

Part 2

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The Sept 2012, 3.50 calls are trading in the $0.12-$0.13 ranges. Attempt to purchase these calls at 12 cents or better. These calls have traded all over the place today. They traded as low as 10 cents so it should still be possible to get into these calls at 12 cents or better. If you are able to get in at 12 cents, you will be able to purchase 3 calls for each put sold.

Benefits of this strategy

You have an opportunity to significantly leverage your position in this stock for a relatively low cost. You would only need to put up $250 to secure the put as opposed to putting up almost $860 if you were to purchase the shares today. One could almost call the trade free as hardly anyone is fully invested in the markets all the time and so the money sitting in your account is dead money. As this money is not being used, one could argue that the money being used to secure the puts is not a real cost as it was not being used anyway. If the other hand you were going to use this money on another play and decided instead to put it to use here, then it would make sense to count the money that is used to secure the puts as part of your cost. With this strategy, you have the ability to control 300 shares for each put you sell.

If the stock trades below the strike price you sold the puts at, the shares could be assigned to your account. Depending on the number of calls you purchased you cost per share could range from $2.26 (if you purchased one call only) to $2.50 (if you purchased 3 calls). If you are bullish on the stock than this should not be a big deal as it gives you the chance to get into the stock at a lower price. However, we would advise against holding this stock for the long term as this speculative play.

Risk factors

First of all this is a speculative play so you are taking on extra level of risk just by considering this play. Secondly the shares could be put to your account if they trade below the strike price you sold the puts at. This could be an issue if you have changed your mind or feel that the stock could trade lower. One way to deal with this would be to roll the put. Buy back the old puts and sell new slightly out of the money puts.

If the stock trades to the 4 plus ranges, consider selling half your position and sell the remaining if it trades to the 4.50-5.00 ranges. If this position is not showing some gain by September, consider closing it out. To do this you would buy back the puts you sold and sell the calls you purchased.

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Company: Zynga Inc

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Brief Overview

  1. Percentage Held by Insiders = 23.48
  2. Number of Institutional Sellers 12 Weeks = 1
  3. Percentage held by institutions = 59%
  4. 7. Profit Margin = -41.57%
  5. 8. Operating Margin = - 45%
  6. 9. Quarterly Revenue Growth = 19%
  7. Operating Cash Flow = 353M
  8. Percentage Held by Institutions = 59%
  9. Short Percentage of Float = 21.7%
  10. Levered Free Cash Flow = 81.7M

Growth

  1. Net Income ($mil) 12/2011 = -404
  2. Net Income ($mil) 12/2010 = 28
  3. Net Income ($mil) 12/2009 = -53
  4. Net Income Reported Quarterly ($mil) = - 22.8
  5. EBITDA ($mil) 12/2011 = N/A
  6. EBITDA ($mil) 12/2010 = 167
  7. EBITDA ($mil) 12/2009 = -42
  8. Cash Flow ($/share) 12/2011 = N/A
  9. Cash Flow ($/share) 12/2010 = 0.58
  10. Cash Flow ($/share) 12/2009 = N/A
  11. Sales ($mil) 12/2011 = 1140
  12. Sales ($mil) 12/2010 = 597
  13. Sales ($mil) 12/2009 = 121
  14. Annual EPS before NRI 12/2007 = N/A
  15. Annual EPS before NRI 12/2008 = N/A
  16. Annual EPS before NRI 12/2009 = N/A
  17. Annual EPS before NRI 12/2010 = 0.38
  18. Annual EPS before NRI 12/2011 = 0.24

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Performance

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  1. Next 3-5 Year Estimate EPS Growth rate = 22.92
  2. Current Ratio = 2.19
  3. Current Ratio 5 Year Average = 1.91
  4. Quick Ratio = 3.03
  5. Cash Ratio = 2.82
  6. Interest Coverage Quarterly = N/A

Conclusion

This is a speculative play and so only investors who are willing to take on extra risk should even consider this play. Consider closing the position out if it's showing a gain in the 60-100% ranges. Alternatively sell half if it trades to 4.00 and the other half it makes to the 4.50-5.00 ranges.

EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical/research data used in this article was obtained from zacks.com. Options tables sourced from yahoofinance.com. Earnings and growth rates obtained from dailyfinance.com. Option Profit loss graph sourced from poweropt.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware