Options traders are more bullish than ever on Facebook , even after a 57% surge over the past month.
The number of existing call options--contracts that benefit from a rise in shares--has soared to a record in the days since late July, when a surprise success in digital advertising revenues helped shares of the social media company trade above their initial offering price for the first time since the company's first day of trading.
"With the earnings report, Facebook showed it's actually a good company," said William Lefkowitz , options strategist at asset management and brokerage firm National Securities . "The stock has come back into favor, but some investors are still nervous, so are looking to options rather than buying the stock."
Facebook shares fell 0.5% to $38.68 Thursday. That is 1.3% below Monday's record close of $39.19 . At its IPO last May, Facebook shares sold for $38 . Last Friday, Facebook shares closed above the offer price for the first time since the launch.
When an investor buys call options, which grant the right to buy shares at a set price by a designated date, the maximum loss is the premium paid for the option no matter how far shares may fall.
As of Wednesday, there were 2.05 million call options outstanding. That number has grown 46% from last month's peak of 1.4 million contracts. The previous peak was 1.74 million call contracts, reached on Feb. 1 .
Stephen Burns , who manages a supermarket and runs an options trading blog from Nashville, Tenn. , started using weekly in-the-money call options after Facebook reported earnings on July 24 . At the end of last week, he moved his position into the follow week's options. As of Wednesday, he held $38.50 call options that expire Friday.
"I love the risk-reward of playing slightly in-the-money call options versus buying stock," he said. "The options are so liquid, and I get so much leverage with so little capital risk."
Mr. Burns said he had been interesting in Facebook's business model before its IPO, but the number of shares created at the time and the value of the launch kept him from buying. Facebook shares finished 23 cents above the $38 offer price in their first day of trading last year, before falling as low as $18.06 in August.
More than twice as many bullish call options traded Wednesday than put options, which profit from a decline in shares. Put options grant the right to sell shares at a set price by a designated date.
The most active options Wednesday included "in-the-money" options expiring at the end of the week, next week or in September. In-the-money call options have a strike price below the current market value of the shares. To profit, the stock must rise above that strike price plus the cost of the option.
The four most-actively traded Facebook contracts Wednesday were weekly $39 and $38.50 call options, August $39 calls and September $38 calls, according to options-data firm Trade Alert LLC . August options expire at the end of next week, while the September contracts expire Sept. 20 .
To be sure, the number of bearish contracts has seen growth as well, though at a slower rate. As of Wednesday, the ratio of bullish bets to bearish ones stood at 1.44 to one, according to Trade Alert data. That compares to a ratio of 1.33 to one a month ago. Yet, the number of puts outstanding remains about 18% below the peak of 1.74 million contracts seen last November, when shares were trading at $23.56 .
The option with the most contracts outstanding was January $25 put options, which grant the right to sell at that price, 36% below Wednesday's closing value. There were 185,906 contracts outstanding as of Wednesday, more than twice the next most active contract, January $32 call options. About 64% of those put contracts were opened prior to June.