Wall Street is readying for the first tranche of almost two billion shares of Facebook (NASDAQ: FB) to hit the market on Aug. 15. This date marks the first of many in which company employees and those who took the chance and invested early in the social media giant are able to cash in their shares.
Over the past few weeks, I've been following the amount of open interest for Facebook options. Judging by activity as of the end of the day on Friday, investors are banking on Facebook trading at $20 to $21 a share around that time. At the closing bell on Friday, Facebook's price was $21.09.
As of Friday, the open interest for the August 20 put was 19,403 and the volume traded was 14,230. The August 21 put had open interest of 18,258 and the volume traded was 9,787. August calls also had considerable activity, but not as much as the puts. For example, the August 20 call had open interest of 5,835 and the August 21 call had open interest of 5,378. The volume was 7,080 and 4,970, respectively.
As I noted in a previous story, this much open interest is good for investors because it means there is more liquidity for the call option being traded. Having more liquidity can give the investor just a little more peace of mind in case they need to close out their position before the strike expiration date.
An option strategy that has been suggested as a good idea for stocks trading in the midst of expiring lock-up periods is writing a covered call. As pointed out by Born to Sell, which focuses on this kind of strategy, this can be especially advantageous for at the money options. This means the option's strike price is the same as, or very near to, the underlying stock price. As of the close of Friday, this was the case with Facebook.
Facebook's lockup period expires over the next several months. On Aug. 15, 268 million shares can hit the market. Another 247 million will be made available on Oct. 14. The bulk of shares may flood the market on Nov. 13, when 1.3 billion become available. And right before these investors could be hit with heavy taxes on Jan. 1, if they don't sell their shares this year, 124 million will be available on Dec. 13.
Much ado has been made about the reasons these investors will sell their shares. The main reason stems from an increase in capital gains taxes they will incur if they sell after Dec. 31.
However, given Facebook's freefall in stock value since its IPO in May, many speculate that these investors may be motivated to take their money and run. Friday marked a rare occasion when Facebook's stock ticked up a bit, but I hardly think that was just because of a renewed interest from investors wanting to own the stock. In fact, the entire market was up after the July jobs report showed more hires than expected.
Facebook had a float of one billion on Friday, and 1.88 billion outstanding shares. Realistically, there is no way that every investor that had been prevented from selling their shares because of the lockup period will sell every single one of their shares on the upcoming expiration dates. However, considering how many are coming available, Facebook's stock value will still be considerably diluted.
Recent expirations of lockup periods for other Internet companies had immediate and negative effects on their stocks. These companies include Groupon (NASDAQ: GRPN) and Zynga (NASDAQ: ZNGA). After Groupon's lockup period expired in June, 600 million of its shares became available for trading. Its stock lost almost 9% of its value.
Online game developer Zynga has a tiered structure like Facebook's for its lockup expirations. The first was in May when 325 million of its shares became available, contributing to the stock's fall of almost 8%. When another 50 million shares hit the market last month, the stock fell an additional 1.5%. And it's not over. The last tranche, 150 million shares, will hit the market on Aug. 16, around the same time as Facebook's.
For a new company, the fact that Facebook already has one billion shares outstanding, and will substantially increase this after the lockup period expires is odd, if not simply troubling.
Still, there is a possibility that not as many shareholders will shed their stock, which could be interpreted as their commitment to the company.
Investors' appetite for Facebook stock has waned since its IPO in May when it debuted at $38 a share. Since then the stock has plunged, touching just below $20 last week. While the IPO was a disaster by most investor standards, market players heard some good news when Facebook reported that its second quarter earnings were in line with analysts' estimates.
Still worrisome is the company's lack of a viable plan to monetize its mobile subscribers. It's seen an increase in these users, like one of its main counterparts, LinkedIn (NYSE: LNKD). However, unlike LinkedIn, Facebook has not enjoyed a doubling of its stock price. In fact, LinkedIn's efforts to monetize its mobile users appear to be paying off. It reported a banner second quarter.
With all of the "what ifs" surrounding how Facebook will trade over the next few months, options may be one of the best ways to trade the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.