Investors can hope the debut of options on Facebook Inc goes more smoothly than the long-awaited debut of the social networking service’s stock on May 18.
While the stock’s puts and calls are expected to be popular, the big wild card is volatility and ultimately, the options price.
Traders will get a fresh start on options on the Internet giant when the contracts are offered on U.S. options exchanges on May 29. BATS Options exchange, a division of BATS Global Markets, will list the options on May 30, following its standard practice of listing new options a day later than the other exchanges.
Plenty of uncertainty surrounds the stock, which debuted to much fanfare at $38 and immediately ran into problems. Facebook’s first day of trading was marred by technological glitches, and the company faces criticism that it sold too many shares, overwhelming demand. A week later, the stock was at $31.47, down 17.2 percent.
Options volume is expected to be robust. “It’s a cocktail party stock and probably will attract a lot of participation from retail traders,” said Steve Place, a founder of options analytics firm investingwithoptions in Mobile, Alabama.
The stock’s valuation remains high – the forward price-to- ratio is at about 56, and the stock is expected to stay volatile. Premiums – the price paid for options – must reflect that uncertainty and will be even more difficult to pin down. “The real issue like everything else in the market is about value, and with Facebook, we simply don’t know what their true earnings power is at this moment,” said Jeff McAllister, vice president of education at options education website optionsanimal.com in Lehi, Utah.
PRICING RISK AN UNKNOWN UNTIL TRADING OPENS: Before the IPO, investors had an anchor on what to expect regarding the share price. But in the options market there is no indication of what the demand will be. So implied volatility, a key component of an options price, which measures the market’s perceived risk of future share price movement, remains an uncertainty until the first transactions.
“Figuring out the implied volatility is a chicken-and-egg scenario – that value won’t be known until the market opens up, when market makers will gauge the supply and demand to price risk,” Place said.
If there is significant demand for options, either through speculators or hedgers, the implied volatility will be elevated, and the price of the option will rise.
Place looked at the implied volatility readings of LinkedIn, Groupon, Pandora, Zynga, Yelp and Zillow from the day their options opened on each of these stocks as well as the stock and options volume.
“Using these past values as a guide, we can expect Facebook options to have a 30-day implied volatility between 65-85 percent,” he said. “The mid 70s would be a good estimate.”
