I saw this article on CNBC.com, "How to Trade Facebook Stock Options," but I suspect it was written before the market close on Friday when Facebook (FB) ended the day at $38.23.
Like Facebook shares, but can't get near them? There are always options.
… It's next to impossible for individual investors to obtain shares at the initial offering price, so if you really want in on the stock you need to think about alternatives. You could invest in another social network, or a basket of technology stocks - or wade into stock options.
Well maybe it was next to impossible for investors to get in at the initial offering price, but Facebook was only 23 cents higher than the IPO price of $38 by day's end.
So investors may not need to "wade into stock options" at all. But if you're thinking of dipping your toe in the water, it's worth taking a look at how some other IPO options began their trading lives.
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Options: Not exactly like "IPO day"
The CNBC article goes on to note that options could begin trading as early as May 29:
A spokeswoman for the CBOE says that "if everything goes as planned, CBOE and C2 could open as early as May 29." And unlike stocks, options can be traded on multiple exchanges, which should boost their availability.
Not so fast. There won't actually be any options available when they launch, whether on May 29 or any other day. When an option series begins trading, it's not like an "IPO day" where you can expect huge volumes. After all, no option exists until someone wants to buy or sell one.
Generally, it takes some time for a reasonable level of open interest to build. For example, take a look at the open interest in LinkedIn (LNKD) and Groupon (GRPN) options the first two months they traded.
The drop offs on the charts are expiration-based, but you can still see it wasn't like an IPO with a huge open interest building up right away.
Yes, the options may indeed trade on multiple exchanges, but I suspect it will be high bid/ask spreads that "boost their availability."
If I were a market maker in these options, I certainly wouldn't be so quick to lower the spread I'd accept to buy or sell these options just to make them "available." Let the IPO underwriters take that risk.
Facebook is obviously a huge IPO, much bigger than LinkedIn or Groupon. But even General Motors (GM) options took awhile to build up a reasonable level of open interest - and that was a pretty big IPO.
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Puts could be "OMG!? How Much?"
The CNBC article goes on to suggest options might be used to place bearish bets on Facebook.
Michael Pachter, a research analyst at Wedbush Securities, offers another potential approach. Pachter argues that one reason Facebook is going public now is to enable longtime investors to cash out before the end of the year, when capital gains rates could increase - possibly substantially. So Pachter thinks options might be a way to trade on potential selling pressure when the lockup period for those investors comes to an end.
Well, that's possible, but if Facebook becomes a difficult stock to short, its puts will no doubt be expensive.
Take a look at how 10% out-of-the-money LNKD and GRPN options have been priced since they first began to trade.
In LinkedIn's case, the 10% OTM puts traded at double the implied volatility of the calls for a few weeks, then settled back down to from "OMG! How Much?" to just plain relatively expensive.
As for Groupon, the puts have stayed in that "OMG!?" range for much of their entire, albeit short, lives.
One clue on how difficult it will be to short a stock is to take a look at the put-to-call premium of the at-the-money options at the strikes closest to the stock price.
For ATM options, there should not be a volatility premium unless the stock is an expensive short. Here's a look at the premium for the ATM options for both GRPN and LNKD.
LinkedIn's ATM put-to-call volatility premium is pretty close to zero now. Groupon? It's still in that "OMG?!" territory.
To see this is dollars and cents, here's a look at the ask price for 13-strike calls and puts on Groupon as of May 16 with the stock at $13.05:
Note that a 13 put for June, which expires in just one month costs more than a 13 call for October that expires in 5 months! That's a pretty big premium for an ATM put.
And even if you're bullish on Facebook, calls on the stock aren't likely to be all that "cheap" anyway - although no one knows what the overall level of implied volatility will be. And that's another reason to wait before trading Facebook options.
It should be fun to watch Facebook options begin trading, but that's all I'm going to do - just watch - at least until open interest builds up to reasonable levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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