Everybody’s Standing in Line to Short Facebook

Article by Investment U

You can’t say I didn’t tell you so…

But just as many of us suspected, Facebook (Nasdaq: FB) shares started their second full week of trading with another flop. They fell 9.6% to close at $28.84 on Tuesday – the first day of options trading in the stock.

In fact, just about everything that could go wrong did…

Let’s summarize what happened in the first seven days of trading:

1. Before the IPO, Mark Zuckerberg seemed disinterested in the road shows.
2. The social network got burned by glitches in the Nasdaq Stock Market’s trading system. That’s called irony. It set back the debut of the shares by more than a half hour.
3. Did Morgan Stanley show preferential treatment to certain clients? A court will now decide that…
4. Facebook and its investment bank underwriters are now in the middle of lawsuits over allegations on how information about slowing revenue growth was shared with potential investors ahead of the IPO. At the moment, three lawsuits have been filed over the IPO.
5. Lately, investors aren’t too thrilled about rumors that the company is looking at buying Norwegian Web browser developer Opera Software. The price tag is reported to be in the neighborhood of about $1 billion. That’s just around what they paid for mobile photo-sharing service Instagram a month and a half ago. Opera lags behind Chrome, Internet Explorer, Firefox and even Safari by a wide margin. We just aren’t sure if that’s smart…

The Biggest Loser…

In terms of market capitalization, Facebook has been the biggest loser since its debut among the companies in the Russell 1000 Index, according to Bespoke Investment Group.

The total loss by close on Tuesday is $21.8 billion in market value. That makes Dell’s decline of $3.6 billion look like lunch money.

To be fair to Facebook, newly listed issues usually have a lot more ups and downs in general, but where it stands in comparison raises eyebrows.

Setting Records for Activity

Kick a dog when he’s down. Or bet heavily that their stock is going to drop with options buying. Remember, investing in options is betting on the direction of a stock in the market. Option activity this past Tuesday soared on Facebook setting a record for any option making its debut, according to data provider Trade Alert.

The largest option trades bet on Facebook where obviously “puts” – which means that investors expect the stock to continue to fall. The biggest trade used puts believing Facebook to slip to $25 a share by mid-July.

So, all this option activity was not looked at fondly for the stock. The shares’ decline, analysts said, was partly due to pressure from “short” sellers, who sell stock they don’t own with hopes of replacing it later at a cheaper price. Take note: Market makers probably were selling Facebook stock short as they sold puts. Selling stock “short” offers protection if market makers have to buy stock from those who have bought puts.

Naysayers accounted for most of the activity, but there was volume the other way, too. It was all across the board. Some investors saw the stock jumping to $65 a share by January 2014. Others were so bearish they had the social network down to $16 a share by December.

The Deal Going Forward

Laura Martin, an analyst with Needham & Co., said Facebook’s shares were seeing downward pressure, as Tuesday was the first day of option trading involving the stock.

“I think Facebook will be a very volatile stock for the next several months,” Martin said. “Right now, the arguments on both sides [of Facebook] are many, and that leads to greater volatility.”

Facebook in the present has a lot of unknown variables. And for the short term – and may be a little bit longer – expect nothing but the unexpected.

Good Investing,

Jason Jenkins

Article by Investment U