By Angela Moon and Doris Frankel
(Reuters) - A sharp decline in Facebook Inc shares has many investors scrambling for options to hedge the risk of further near-term weakness in the company's struggling stock.
Volume on Facebook options soared on their first trading day on Tuesday as the underlying stock plunged below $29 a share for the first time, down more than 24 percent from its initial public offering price of $38.
The busiest options contract on the stock was June $30 strike puts, with more than 23,700 contracts on the tape at an average price of $1.71 per contract, according to Trade Alert.
"The majority of the participants have been selling calls and buying puts in Facebook," said Steve Place, a founder of options analytics firm investingwithoptions.com.
Some investors might be purchasing June puts on Facebook to hedge the risk of further losses in the short-term amid ongoing volatility in the underlying stock, said Joe Cusick, senior market analyst at online brokerage optionsXpress.
Shares were hit hard on Tuesday, closing 9.62 percent lower at $28.84. Earlier in the day, the shares fell to $28.65, an all-time low in the short trading history of the social network. Facebook went public with much fanfare more than a week ago, but its first trading day, May 18, was marred by technological problems on the Nasdaq Stock Exchange and the shares have been sliding ever since.
"As shares sold through $30 at noon on Tuesday, put buying picked up with some purchases of the August $29 strike puts of more than 1,000 contracts at $3.30 per contract," said Trade Alert President Henry Schwartz. "The trade would be profitable at August expiration if shares were to close below $25.70."
Put options, generally considered bearish bets, give the holder the right to sell shares at a specific price by a certain date, while calls, generally considered bullish bets, give the holder the right to buy shares at a fixed price.
Options volume on Facebook was about 365,000 contracts, with 203,000 puts and 162,000 calls traded, for a put-to-call ratio of 1.25, Trade Alert data showed. The overall option turnover is the second-highest for a single stock, trailing only Apple Inc.
"Although just shy of 400,000 option contracts, this is the best first-day listing for a new option that I ever seen," Schwartz said.
EASIER TO BORROW
Facebook securities have become easier to borrow. The volume of Facebook's securities on loan fell to about 44 million late on Tuesday, down from a peak of 59 million shares on May 24, cutting the cost of borrowing to about 1 percent. That is an additional reduction by about 50 percent from Friday's level, according to Tim Smith, executive vice president of Astec Analytics, a division of Sungard Financial Systems in New York.
"Until the borrow rate gets to be as easy as Apple Inc, Facebook puts will be priced more expensive than calls, all else being equal," said Enis Taner, global macro editor at option trading website RiskReversal.com.
The demand for Facebook options was accompanied by fairly rich implied volatility, a key component of an options price, which measures the perceived risk of future share price movement.
Implied volatility on Facebook's June at-the-money options rose steadily throughout the session as the shares sold off. It stood around 63.5 percent at the end of Tuesday's session, Trade Alert figures showed. By contrast, social media network LinkedIn Corp's at-the-money June implied volatility was around 59 percent.
(Reporting by Angela Moon in New York and Doris Frankel in Chicago; Editing by John Wallace, Steve Orlofsky and Matthew Lewis)