Zynga Inc ZNGA shares are up 57.7 percent year to date, but some option activity on Tuesday morning suggests it may be game over for the Zynga rally.
There were three large bearish Zynga options trades on Tuesday morning, and the unusual option activity may suggest Zynga’s upcoming games could disappoint the market.
The Trades
On Tuesday morning, Benzinga Pro subscribers received two options alerts related to Zynga.
The alerts came during a roughly 10-minute stretch starting at 10:29 a.m. on Tuesday. The trader first sold 5,000 call options at a $6 strike price that expire on Sept. 20. The calls were sold at the bid price of 65 cents and represent a $325,000 bearish bet.
About 10 minutes later, likely the same trader dumped another 3,765 of the same Zynga September call options, this time at an even lower bid price of 63.1 cents. The second trade represented an additional $237,571 bearish bet.
Finally, roughly an hour later, likely the same trader came back and sold another 4,799 of the same Zynga call options, again at an even lower bid price of 58 cents. The third trade represented another $278,342 bearish bet.
The batch of bearish trades represents an aggregate $840,913 bet that Zynga shares won’t be heading any higher over the next four months.
Options Insight
Many stock traders watch the options market daily to gain insight into to what options traders are thinking. Even if they aren’t trading options themselves, stock traders stay on the lookout for unusual option trading activity.
Options traders are typically seen as more advanced than the average stock trader given the sophistication of the options market. The larger the order, the more traders pay attention to what could be an institution or wealthy individual or industry insider with unique insight into a stock.
Institutional Hedge?
On the surface, the bearish options trades may seem like bad news for Zynga investors. While an $840,000 bearish bet isn’t very large for an institution, the manner in which the trades were executed suggests there’s a chance the calls represent a hedge on a large bullish stock position.
Stock traders often use the options market to hedge larger stock positions. It can sometimes be difficult to determine if a large option trade represents a trader’s true sentiment toward the underlying stock, but there are clues to watch for.
In the case of Zynga, the fact that the orders were broken into three small trades is a sign that it could be an institution trying not to be noticed. Institutions often break large orders into many small orders so they don’t draw attention to their trading activity.
If an institution is responsible for the trading activity in Opko options, they may continue selling small blocks of call options throughout the day as they add to a long stock position in Zynga. If the trades are a hedge, it may be a good sign that an institutional investor has high hopes for an upcoming Zynga game release.
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