As Facebook Inc. prepares its initial public offering, traders are boosting the cost of bearish options at a record rate for LinkedIn Corp. and four other Internet companies that sold shares in the past year.
Puts trading 10 percent below shares of LinkedIn, Groupon Inc., Zynga Inc., Pandora Media Inc. and Yelp Inc. cost an average of 5.12 points more than calls 10 percent above on May 14, data on 30-day options compiled by Bloomberg show. That’s almost four times more than at the record low reached in April.
The price of protecting against declines in newly public Internet companies is increasing after LinkedIn and Pandora fell more than twice as much as the Standard & Poor’s 500 Index during last year’s market selloff. The benchmark index for American equities has slipped 5.7 percent since its 2012 high on April 2, falling to its lowest level since February. It lost 19 percent between April and October 2011.
“There’s a lot of uncertainty creeping into the markets and that’s having a big impact on these high-risk names,” Josef Schuster, the founder of IPOX Schuster LLC which manages about $1.9 billion in Chicago, said yesterday in a phone interview. “People are looking for downside protection.”
Internet radio pioneer Pandora fell as much as 51 percent last year, while LinkedIn lost 46 percent between July and November. Historical volatility, a measure of price swings tracked by options traders, has climbed above 50 for LinkedIn, Groupon, Zynga, Pandora and Yelp. Only 20 stocks in the S&P 500 have higher 30-day levels than that.
Julie Mossler, a spokeswoman for Groupon, Zynga’s Stephanie Hess and Vince Sollitto of Yelp declined to comment on the options trading. Spokesman Hani Durzy from LinkedIn and Pandora’s Deborah Roth didn’t return a phone call and an e-mail seeking comment.
Facebook, scheduled to sell stock on May 17, boosted the price range of the deal to $34 to $38 a share, according to a regulatory filing today. That implies a market value of as much as $104.2 billion.
Should the world’s most popular social-networking site’s IPO fail to deliver the gains investors expect, sentiment toward similar stocks may deteriorate, according to Carlo Panaccione of Navigation Group Inc.
“The fear is that Facebook is going to be priced a little bit more than it’s worth,” Panaccione, co-founder of Navigation Group which oversees $370 million in Redwood Shores, California, said yesterday in a telephone interview. “Couple that with the fact that we had a rough summer last year and you see these spikes in the options trading.”
Facebook said last week that growth in advertising sales isn’t keeping pace with gains in users, many of them logging on from handheld devices.
The company plans to stop taking orders today for its IPO, two days ahead of schedule, a person with knowledge of the transaction said yesterday. The Menlo Park, California-based company is poised to surpass United Parcel Service Inc. as the most valuable company in history to go public in the U.S., based on market capitalization, data compiled by Bloomberg and Dealogic show.
Groupon, the largest daily-deal website, reported profit yesterday that topped analyst estimates as marketing costs dropped and it expanded. The results, which spurred an 18 percent rally in the shares after the close of U.S. trading, may bring investors back to social media companies, according to Michael Obuchowski of First Empire Asset Management.
The results “might be a turning point,” Obuchowski, chief investment officer at First Empire Asset Management in Hauppauge, New York, which manages about $4.9 billion, said yesterday in an interview. “If Groupon can appease the investors and show solid numbers, then that could turn the tide and generate a lot more interest in those companies in general,” he said. These are “risky but potentially game-changing business models,” he said.
The Global X Social Media Index exchange-traded fund, which tracks the Solactive Social Networks index and includes the five U.S. Internet stocks, dropped 8.3 percent this month as Tokyo-based Gree Inc. tumbled after regulators in Japan questioned one of the company’s sales methods.
Groupon slumped the most this year among the five American companies, losing 43 percent through yesterday amid concerns about its financial statements. Skew, as measured by the difference between prices of puts to calls, for Groupon was 8.85 yesterday before the report, close to the 9.74 reached in April, the highest level since December.
Implied volatility, the key gauge of options prices, for 30-day contracts closest to LinkedIn’s stock price has risen 50 percent since its March 1 low, data compiled by Bloomberg show. Skew jumped to 9.66 yesterday after reaching its lowest level ever on March 23, the data show.
Shares of the biggest professional-networking website, which had its IPO a year ago, lost 5.8 percent since touching a record $117.30 on May 4, the day after it reported that first-quarter sales and profit beat analysts’ estimates amid a jump in membership.
Implied volatility for gaming company Zynga, which went public in December, was 28 percent above its historical average, while the measure for Pandora, which held its IPO last June, was 8.2 percent higher than its average. Implied volatility for Yelp, the website that allows people to comment on businesses and services, was 5.9 percent more that its all-time average.
The Chicago Board Options Exchange Volatility Index, known as the VIX, climbed 10 percent yesterday to 21.87, its highest level since Jan. 17. It added 0.5 percent to 21.97 today. The VStoxx Index, which measures the cost of Euro Stoxx 50 Index options, rose 5.1 percent to 33.31 today, reaching the highest level since Dec. 14.
Mountain View, California-based LinkedIn is valued at 12.5 times this year’s estimated revenue, according to data compiled by Bloomberg. That compares with ratios of 9.4 for Yelp, 4 for Zynga, 3.9 for Pandora and Groupon’s 3.3. S&P 500 companies trade for an average 2 times estimated sales. Of the five companies, only LinkedIn was profitable last year.
“If you had just invested in social media stocks across the board, you would have done rather poorly,” Benoit Flamant of IT Asset Management in Paris, which owns LinkedIn shares and manages about 200 million euros ($257 million), said yesterday in a phone interview. “I’m not in a rush to invest in Facebook.”