Volume may have been light on Friday as investors headed home to celebrate this summer's last holiday, however you wouldn't be able to tell that from the way Facebook (FB) was trading. Investors seemed to stay around long enough to profit as much as possible from the suffering stock by dumping it and/or hedging their bets in the options market for the short term.
Average volume for the put upon social networking site is about 36 million (three months), however on Friday it was nearly 59 million. The activity helped the stock sink to new lows, closing Friday at $18.06, which was a decline of 5.4% for the day. The markets' sentiment about the direction of Facebook's stock could also be seen in the options market, where the bulls seemed to be running the show.
Last week was particularly brutal for Facebook. It saw two Wall Street analysts lower their price targets for it, according to The Wall Street Journal. Bank of America-Merrill Lynch dropped its target to $23 a share. While Bank of Montreal lowered it target to $15 a share.
Further aggravating many investors was news that eMarketer cut its earnings estimate for Facebook by $1 billion. Earlier this year, the research firm had estimated that Facebook would earn $6 billion. eMarketer limits Facebook's revenues to $4.23, billion which is about 34% higher than they were in 2011. It predicts revenue increases in the double digits to continue through 2014, when Facebook's worldwide ad revenues will reach $6.81 billion.
Few things reflect investors' sentiments about a stock like a dramatic rise in the number of call or put option contracts for it. The newly minted public Facebook is a prime example of this. The open interest and volume traded for put contracts continues to be strong, and with the stock continuing to hit fresh new lows, bears are enjoying a good run.
For the weekly option that expires Thursday, Sept. 6, the most activity was for the $18 call, which was in the money at the time this article was written. Volume traded was 15,658. Next was the $19 call, which at the time of writing, was out of the money. Volume traded for it was 13,238.
Trading for the puts was almost equally as active. The put with an $18 strike price had a volume of 15,683 traded. It opened at $.10 and the bid was $.30, which represented a 200% increase for those who got in on it.
Considering these options expire this week keep in mind that more than 75% of all options held until expiration expire worthless, notes the Born to Sell options site.
Causing pause over Facebook, are the numerous challenges that lie ahead for it. The darkest cloud hanging over the company is the unlocking of more than one billion shares in the coming months.
Facebook's lockup period expires over the next several months. On August 15, 268 million shares were eligible to be sold by eligible shareholders. Another 247 million will be made available on October 14. The bulk of shares may flood the market on Nov. 13, when 1.3 billion become available. 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 worrisome.
So, if you go the way of others, consider the options expiring this week. I expect the volumes and open interest to also pick up for the coming months as the lock-up expirations continue.