* Options market sees 6 to 6.5 pct move for Facebook shares
* IPO lockup expirations for Internet stocks have a negative
* Subsequent Facebook share lockups could hurt stock
By Doris Frankel
Aug 15 A deluge of Facebook (FB.O) shares are
set to hit the market Thursday as a lockup period preventing
some insider sales comes to an end, but this may not trigger
more pain for an already battered stock.
The largest social media network went public in May in one
of the most anticipated initial public offerings in years, with
an initial sale of 421 million shares. But concerns about
valuation and growth prospects have hammered the shares, which
were trading early Wednesday at $20.74, compared with the $38
IPO price and a $45 high in the minutes after it started
The stock's slump may actually work in its favor this week.
Insiders may be less likely to dump the 271 million shares that
are unlocked on Thursday as they hope for a recovery first.
"If Facebook was trading at $30, we would see a much larger
effect from the lockup expiry. But at $20? Not so much,"
said Steve Place, a founder of options analytics firm
investingwithoptions.com in Mobile, Alabama.
Options trading suggests a move of a little more than 6
percent by Friday, with slightly more investors expecting a dip
in shares than a rise. That kind of move isn't far out of the
ordinary for the stock.
Place said those players with shares tied up in the lockup
may opt to hang onto the losing position for now, as investors
tend to hold their positions that are underwater in the hope
they will rebound so they can break even.
Among the largest potential sellers who will be freed from
the lock-up are venture capital firm Accel Partners, Russia’s
DST Global Limited and Microsoft Corp (MSFT.O), as well as
PayPal founder Peter Thiel.
These investors bought in at different times. In particular,
Thiel and Accel were among the earliest backers, so they're
likely to make a big profit. Microsoft invested $240 million in
2007 at an assumed valuation of $15 billion for Facebook; at its
current stock price the company is worth about $45 billion. DST
bought shares at different prices.
The greater concern about insider sales appears to be
concentrated later in the year. Later-dated options contracts
suggests more worry then, with a further 1.44 billion shares -
spread over several expirations - available for trading by the
end of the year.
Social media stocks have lost their status as Wall Street
darlings, with shares of much-hyped IPOs such as Zynga Inc
(ZNGA.O) and Groupon Inc (GRPN.O) falling to historic lows.
Lock-up expirations in Internet stocks have been
opportunities to sell in the past, especially when there is
venture capital money behind the name, Place said.
Earlier this month, Thiel, one of Facebook’s earliest
backers, converted slightly more than 9 million class B Facebook
shares to class A shares, which are easier to sell on the public
market, according to regulatory filings.
Thiel, Accel, and DST did not respond to requests for
comment. Microsoft declined to comment on its plans.
Another 243 million shares are set to become available
between mid-October and mid-November. On Nov. 14, more than 1.2
billion shares will be available for trading. CEO Mark
Zuckerberg will not be able to sell his shares until then.
Short bets against Facebook have steadily increased since it
first went public. According to Markit, about 79 percent of the
shares available for short bets were being borrowed for this
purpose, just off a peak reached about a week ago. The average
stock has about 16 percent of available shares borrowed for
TELEGRAPHED AND EXPECTED
The first expiration is "so well telegraphed and expected,"
said one trader, who asked not to be named as his firm actively
trades Facebook shares, but also said later lockups are more
important for insiders.
As of Tuesday, the expected move in Facebook by Friday's
close when August options expire is about 6 to 6.5 percent. It
suggests the stock would end the week between $19.25 and $21.75.
But Facebook is a high volatility name already, averaging
moves of 4 percent daily since its IPO. A move of 6 percent is
not abnormal, said Enis Taner, global macro editor for options
trading firm RiskReversal.com in New York.
"I would be surprised to see it have a material impact in
the short run," said Rick Meckler, president of investment firm
LibertyView Capital Management in New York. "If it can stay in
this general range there's a lot of people who have sold in
front of the news and may decide that it's not as big a deal."
The steady flow of shares in the market could have a
dampening effect on the stock in coming months. Much can happen
between now and January, bu t th e near-term risk as reflected in
the options market points to a greater likelihood of a downside,
rather than upside move, according to options analytics firm
Livevol. The p ut-to-call open interest ratio on the January 2013
$20 Facebook strike alone is about 40 to 1.
This may reflect worry about the lockup expiration, but also
concern that the company's high valuation is still not
justified. Thomson Reuters StarMine suggests the intrinsic value
of the stock based on growth expectations for the next decade at
about $9.76 a share.
"The options market suggests further concern for the future
of the share price," said Gareth Feighery, a founder of options
education firm MarketTamer.com in Philadelphia.
"While this is not definitively bearish since we don't know
if all those puts were bought, it certainly bodes ominously if
options traders skew their bets towards the purchase of bearish
put options in coming months as the supply of shares increases."
(Reporting By Doris Frankel; Writing by Doris Frankel and
Angela Moon; Additional reporting by Angela Moon and Ed Krudy in
New York and Alexei Oreskovic in San Francisco; Editing by
Messaging: Reuters Messaging:
Keywords: FACEBOOK LOCKUP/OPTIONS
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