Facebook Stock Options: Bears Come out to Play

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It's been an interesting ride so far since the Facebook stock options left the starting gate Tuesday.

Expected to hit the 400,000 contract mark on their first trading day, the options closed with a total volume of 369,478 contracts, according to The Options Clearing Corp (OCC). Only Apple Inc.'s (Nasdaq: AAPL) options had more trading volume than Facebook on Tuesday.

Unfortunately, the underlying Facebook (Nasdaq: FB) stock price wasn't as charming as it dropped under $29 a share for the first time Thursday. That's more than 23% below its IPO price of $38 on May 18.

The options market has highlighted investors' lack of faith in the Facebook stock price.

Put options, usually recognized as a bearish bet, give a holder the right to sell shares at a specific price by a certain date. Call options, on the other hand, are usually considered a bullish bet and give the holder the right to buy shares at a specific price.

In its first three days of trading, put volume has continued to outdo call volume. It appears that everyone is down on this stock.

Until Facebook stock stops falling, most investors remain too wary to buy.

"Short-term we are still cautious but there should be reasons for optimism later this year and next," Pivotal Research analyst Brian Wiesner told Reuters.

Small Investors Favor Facebook Stock Options

So who's been trading Facebook options? It is the small investor who has been eager to trade.

Jeff Shaw, head of trading at Timber Hill, the market-making unit of Interactive Brokers Group (Nasdaq: IBKR), saw a large portion of options come in small contract batches on Tuesday, which suggested to him interest came from small investors.

Joe Kinahan, chief derivatives strategist at retail brokerage TD Ameritrade said to Dow Jones, "You don't usually see this incredible first-day volume. The markets have been very liquid, which is very good for the [individual] investor."

Smaller retail investors like trading the stock without shelling out as much money as it would take to buy or sell shares of Facebook.

"In general, investors are still expecting volatility in the shares," William Lefkowitz, options strategist at brokerage firm vFinance Investments, told CNBC. "With options you can go long or short the stock at the fraction of the cost of buying or selling the underlying shares."

Adding to the excitement, more options exchanges entered the race with nine actively participating on Wednesday.

Volume tapered Wednesday to 247,134 contracts, according to OCC data. The put-to-call ratio still showed puts ahead: 1.17 to 1.

The busiest Facebook options contract was the June 30 puts, with more than 18,241 contracts averaging a price of $1.45 per contract, according to Trade Alert.

Morningstar explained that with most of the volume in June options, they had been inexpensive and simple to "day trade." This paints a picture of short-term volume or maybe participants sticking with the near-term since they aren't really sure what will happen.

In the early afternoon,Thursday July 27 puts had the honor of being the most actively traded option with 6,600 contracts changing hands. Other active puts were the July 23s and the June 27s that expire next Friday and the following week.

Investors interested in Facebook stock options should watch for Facebook's quarterly earnings report slated for July 25. A better-than-expected report could shift the options trading sentiment.

Facebook stock was down by more than 5% to $28.09 by 11:30 a.m. EDT Friday.

[Editor's Note:I've seen firsthand over the years just how few people really understand what options can do for them.

That's why we've spent the past few months creating an exclusive investor's guide called "The Power of Options." It's ready for you today. And it could be the most important thing you read all week.

The best part is we are giving it to every single subscriber for free.

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