Meta plunge fuels ‘insane’ options volume as some bet on bounce

A plunge in the shares of Facebook owner Meta Platforms Inc fueled a surge of options trading on Thursday, with some investors positioning for a quick rebound in the company’s stock.

With Meta shares down around 25%, over 1.4 million options contracts on the company had changed hands by 12:30 p.m. (1730 GMT).

That puts the options on track to finish the day with about 2.5 million contracts traded, compared with the previous record daily volume of 1.8 million contracts on Aug. 7, 2020, according to data from options analytics firm Trade Alert.

“It’s pretty insane,” said Henry Schwartz, head of product intelligence at Cboe.

Wow! Facebook loses more than 200 billion according to Yahoo Finance. They will go down as the face without the book and the book with no pages.. pic.twitter.com/4lazeKkG6r

— Diamond and Silk® (@DiamondandSilk) February 3, 2022

Meta shares plunged after the social media giant late on Wednesday issued a dismal forecast, blaming Apple Inc’s privacy changes and increased competition.

Much of Thursday’s options trading was in weekly options, with contracts set to expire on Friday making up about 40% of the trading volume, according to Trade Alert data.

Call options betting on Meta shares finishing above $250 by Friday were the most heavily traded Meta contracts on Thursday, with nearly 50,000 options traded.

“Volatility data shows an interest in upside bets,” Schwartz said.

Calls convey the right to buy shares at a fixed price in the future, while puts convey the right to sell the shares.

$SNAP was down 23% on the day… and is now up 32% after hours.

This is not bull market behavior. This level of volatility and insanity is not healthy.

Facebook (Meta, whatever) is a legit systemic risk. pic.twitter.com/by6esyLc8h

— The Wolf Of All Streets (@scottmelker) February 3, 2022

Some traders were buying stocks and selling upside calls, Schwartz said. Such a strategy would allow them to collect a premium from the sale of the call while benefiting from a potential bounce in the stock.

The sharp drop in Meta shares likely hurts market makers – typically large banks or financial institutions – who may have sold Meta options straddles ahead of the results.

The straddle refers to an options strategy in which an investor holds a position in both a call and put option with the same strike price and expiration date. The price of the straddle serves as the market’s expected move in the stock.

“Market makers have to have taken a big loss on this one … this has got to be painful,” said Matt Amberson, principal at options analytics firm ORATS.

The huge move also appears to have taken options markets by surprise, accounting for some of the huge volume, analysts said.

Meta shares were expected to move only about 4.8%, based on the price of options straddles ahead of the results, Amberson said.

The Meta share drop, far in excess of its straddle pricing, also goes counter to recent earnings-related stock price moves, where stocks have generally tended to move a lot less than options have implied,

Over the last three weeks, the average actual earnings move logged by the stocks of companies that reported results was only about 85% of the average move expected by options prices, an ORATS analysis showed.

(Reporting by Saqib Iqbal Ahmed in New York; Editing by Ira Iosebashvili and Matthew Lewis)