Morning Update

Yesterday shares of Zynga popped 10% on rumors that it could be a takeover target. This set option traders into a call buying frenzy, with triple the average daily volume changing hands yesterday. One of the biggest trades of the day was the purchase of 1129 April 4.5 calls for $0.22 with the stock at 3.90. This is a bullish bet that the stock will close above 4.72 at April expiration, an increase of 21%.

Last year Zynga traded up to a high around $15.91 per share before plummeting to close 2012 at $2.63, a loss of 83%. However, so far the stock is up 50% year to date making it a top performer. Traders like this call buyer were speculating yesterday that Yahoo could buy Zynga, which will a catalyst for the stock to continue its rally into April expiration. But is a buyout by Yahoo really in the cards?

Marissa Meyer’s goal is to integrate Yahoo into its user’s daily habits, so the real question is does Zynga’s games fall under the category of daily habits? Yahoo does have a games site but it does not attract the traffic it once did. Zynga is trying to figure out how to monetize these web based games, and if it is successful would be a valuable asset to Yahoo. But unless Yahoo has its own plan of how to accomplish this a Zynga buyout is unlikely.

Buying these calls is a speculative trade and one that I am going to steer clear of for the moment. Zynga has a lot of potential if it can monetize its games or capitalize on online gambling, which was recently legalized in Nevada and New Jersey. But I would prefer to wait and see what the future holds for the company before buying calls or stock., especially after a 50% rally in a matter of weeks.