This morning 773 million Facebook shares will be free to hit the market as another stock lock-up expires. There are currently 2.3 billion shares circulating, so the new shares eligible to be traded today represent an increase of 33%. In the past Facebook’s stock price has tumbled on lock-up expiration days. This time, however, traders do not appear to be making as bearish bets as in the past. According to the WSJ the number of Facebook shares being borrowed to short has declined by 40% this month and is at its lowest level since June. The cost of borrowing Facebook shares has likewise been halved as demand is no longer there. Yesterday Facebook puts were very active, but mostly on the sell side. One trader sold 12,590 Nov. 19 puts for $0.30 with the stock trading 19.95. This is a bullish to neutral bet that Facebook will not decline below 18.70 (6.2% lower) by expiration this Friday. If Facebook is below 19, the trader will be put to the stock there, but regardless the trader gets to keep the $0.30 in premium received for writing the puts.
Prior to past lock-up expirations we have seen heavy put buying, so yesterday’s options trading was quite different. In total $1.6 million in put premium was sold yesterday on over twice the average daily trading volume. Selling an out of the money put is a bullish to neutral strategy, and by employing it yesterday traders are saying they think Facebook will not decline much more this week. The reason for this bullishness is simply that Facebook could be oversold – share are already down over 50% from its IPO price and down over 17% since it reported better than expected earnings on Oct. 23rd. The lock up could already be priced into the share’s price, making today a near term bottom. However, the fact that traders are selling November puts and not December or further dated contracts is telling that the risk in the stock over the long term remains to the downside.