Investors flocked to the options market to protect shares of Facebook Inc. (FB) from more losses, making contracts on the social network website the most popular among the biggest initial public offerings in the last decade.
A total of 202,938 puts to sell the Menlo Park, California-based company and 162,482 calls to buy changed hands yesterday as the contracts traded for the first time, according to data compiled by Bloomberg. The total of 365,420 compares with 65,213 traded after General Motors Co. (GM)’s IPO and 22,736 for Google Inc. in 2004, then the biggest Internet offering ever.
Facebook shares lost $9.16 since the May 18 IPO to close at $28.84 yesterday. The company, its underwriters and Nasdaq OMX Group Inc. were sued last week by investors who say they lost money in the offering, sold during the biggest retreat in global equity markets since September.
“The option market is implying the volatility Facebook investors have experienced isn’t going away,” Nelson Saiers, who oversees $639 million at Alphabet Management LLC in New York, said by phone yesterday. “It will be a significantly more turbulent investment than other companies of comparable market capitalizations.”
Facebook rose 0.3 percent to $28.92 at 11:50 a.m. in New York today.
Implied volatility, the key gauge of options prices, for three-month contracts closest to Facebook’s stock price was 63.50 yesterday, data compiled by Bloomberg show. Only seven stocks in the Standard & Poor’s 500 Index have higher levels than that. The bets on price swings in Facebook compare with 30.65 for Google (GOOG) and 36.39 for GM, which had the largest offering of common stock in history.
GM, Google Options
When GM contracts started trading on Nov. 29, 2010, 50,838 calls and 14,375 puts changed hands, the highest volume among the biggest U.S. IPOs on a first day of options trading excluding Facebook, data compiled by Bloomberg show. For Google, 7,389 calls and 15,347 puts were exchanged on Aug. 30, 2004. LinkedIn Corp. (LNKD), the biggest professional-networking website, had call volume of 10,390 versus 12,404 puts on May 27, 2011.
Facebook’s implied volatility on three-month contracts for puts 10 percent below the shares was 65.77, while calls 10 percent above were trading at 61.40, according to data compiled by Bloomberg.
Ashley Zandy, a Facebook spokeswoman, declined to comment on the options trading.
Facebook raised $16 billion on May 17 in the biggest technology IPO in history. The stock climbed as high as $45 on May 18, when the shares ended the day with a price-earnings ratio of 83.1, making Facebook more expensive than 99 percent of S&P 500 companies.
The eight-year-old social-networking site produced the worst five-day return among the largest U.S. deals of the past decade. The 13 percent plunge through May 24 exceeded the 10 percent drop by MF Global Holdings Inc. in its first five sessions, according to data compiled by Bloomberg.
Criticism of the Facebook IPO is mounting after the stock slipped below $30 yesterday for the first time. The company and Morgan Stanley increased the number of shares to sell by 25 percent to 421.2 million days before the offering and pushed the asking price to $34 to $38 from $28 to $35.
The first day of trading for the stock was disrupted by the “poor design” of Nasdaq OMX’s software for IPO auctions, Robert Greifeld, the chief executive officer of the exchange operator, said on May 20. The malfunction also prevented Nasdaq OMX from sending messages to brokerages confirming that clients’ orders went through. Bearish options wagers on Nasdaq OMX jumped last week to the highest level in more than two years. The stock has lost 3.4 percent since May 17.
June $30 puts were the most active among all Facebook contracts yesterday, changing hands 23,835 times and representing 6.5 percent of the total options volume for the day. June $34 calls and June $32 calls followed with volumes of 15,286 and 15,178, respectively, data compiled by Bloomberg show. Yesterday’s volume of contracts in Facebook was the second-biggest in the U.S. stock options market after Apple Inc. (AAPL)’s, data compiled by Chicago-based OCC show.
“A bearish bias that was seen in the first hour of trading carried through the entire day,” Joe Kunkle, founder of OptionsHawk.com, a Boston-based provider of options-market analytics, said in an e-mail yesterday. “The amount of volume for the first day of trading in the options was incredible.”
The Chicago Board Options Exchange Volatility Index, known as the VIX (VIX), climbed 12 percent to 23.47 today. Its European counterpart, the VStoxx Index, a measure of Euro Stoxx 50 Index option prices, advanced 9.9 percent to 34.51.
Oversupply of Shares
Facebook’s decline resulted from too many shares being sold in the IPO rather than a fundamental issue with the company’s business model, according to Wedbush Securities Inc.’s Michael Pachter, who says the stock will rally to $44 over the next 12 months.
“The plummet has nothing at all to do with the company’s fundamentals, it is solely a function of the misjudging of demand,” Pachter, who rates Facebook outperform, said last week in an interview with Tom Keene on Bloomberg Radio. “It’s still a company with 900 million users that are engaged to the tune of about 4,000 minutes a year, and that’s a lot of page views and a lot of advertising opportunities.”
The rating means the Los Angeles-based analyst expects the stock to perform better than the median total return of the companies he covers over the next six to 12 months.
Short-selling bets against Facebook amounted to 9.9 percent of the shares sold in the company’s offering, according to data compiled by Bloomberg and Data Explorers Ltd., a New York-based research firm. That compares with an average of 2.9 percent for companies in the S&P 500, data compiled by Bloomberg show. Short sellers borrow shares and sell them, hoping to profit from a decline in the stock’s price.
In Europe, the most actively traded structured products tied to Facebook since its IPO were so-called put warrants, whose buyers profit if the shares drop below a pre-defined level, in some cases as low as $19.50, data compiled by Bloomberg show. There were as many as 1,642 warrants and certificates listed on European exchanges yesterday.
“Given the fact that the stock is already trading $9 below IPO price, some investors might prefer to own options rather than stock in order to limit their risk to the premium paid,” Alex Panagiotidis, managing director for equity derivatives at Sterne Agee & Leach Inc. in New York, said in an interview yesterday, referring to the cost of the contracts. “It’s an alternative investors didn’t have the first days of trading.”