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Some ways to play Facebook options

Chris McKhann (chris.mckhann@optionmonster.com)

Regardless of what you think of Facebook's much-maligned stock, its newly launched options may offer some interesting opportunities.

FB options garnered tremendous interest in its inaugural session this week: optionMONSTER's systems showed that 363,000 contracts traded on Tuesday, with puts making up 202,000 of that volume. Another 240,000 changed hands yesterday, again with puts outpacing calls.

Most interesting is the relative parity of the implied volatility of the calls and puts. Although the stock may be hard to borrow, it can't be too hard because the implied volatility of the puts is just slightly higher than that of the calls.

The rate is 68 percent for the June 28 puts and 66 percent for the calls. In July it is 64 percent for the puts and 60 percent for the calls. Other recent IPOs, such as LinkedIn's , had much bigger differentials and therefore presented different opportunities.

Now let's compare the implied volatility of the options to the actual volatility of the stock. The actual rate is above 100 percent, but of course that is based only on eight trading sessions, and the first days are notoriously volatile for such IPOs. So it is hard to know if the options are expensive at these levels.

Those who are bullish might consider selling cash-secured puts here, taking advantage of relatively high premiums while waiting to buy the stock at lower prices . If FB falls, investors can purchase shares at an effective discount once the premium from the put sale is factored in.

Spreads are also a good way to trade directional plays. The put spreads in particular leave the skew into your favor, as out-of-the money contracts have higher implied volatility than those that are at the money.

Finally, there is an interesting dynamic with the expirations. We have already looked at the fact that the July options have lower implied volatility than those in the June contracts, which makes sense, but it rises again in August with 68 percent for the 28 puts as earnings are priced in.

In cases such as this, calendar or diagonal spreads are quite interesting. The idea is to buy the July options and sell the June contracts with an eye toward the stock settling down and time premium coming out of the nearer-term options.

That is a limited-risk way of taking advantage of the volatility and can be tailored to a directional bias as well. (See our Education section)

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of May 30.)

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