What happens when a risky bet turns against investors? For many Facebook (NAS: FB) traders, the answer appears to be making a more speculative bet in the opposite direction.
Facebook once again was the center of the investing world again today. Unfortunately, that's not a good thing, as its shares were down nearly 10% during the day's trading. The big news surrounding Facebook today was the options market, as contracts on the company became available.
The opening of options provided a new way for investors to go short the stock, with less total capital needed than a plain-vanilla short. And options activity was quickly extremely active on Facebook. Options volume on the company ranked second behind only Apple (NAS: AAPL) , a company almost eight times as large as Facebook, with a popular strategy revolving around selling calls to get income to buy puts on the stock. Effectively, that's a synthetic short in a very liquid market.
What's even more interesting is that the tolerance for heapings of speculation around the company hasn't cooled, even after its troubled IPO that burned individual investors. Bets on options that expired in a mere 17 days saw extremely heavy trading action.
Investors holding Facebook shares noticed the ravenous demand for alternative ways to short Facebook using options and likely sold a part of their holdings in response. It is common for indirect pressure from the options markets to weigh on the equity market.
Beyond options: dumb acquisition alert
Beyond options trading today, there were other reasons for Facebook's plunge. First among them is continuing speculation that the company will enter the smartphone market. Facebook has reportedly hired more than a half dozen hardware and software engineers from Apple and is looking to build a Facebook phone.
That's a pretty absurd idea, and the naivete in feeling the need to design its own phone with so few internal resources shows Facebook's inexperience. Facebook is clearly troubled by Apple's deep integration with Twitter and the threats of being closed out of Apple's "walled garden," but moving into operating systems is a terrible response.
In terms of Internet companies at frothy valuations in little-understood growth industries, this move is akin to if AOL had decided to build an operating system in the mid-'90s to combat Microsoft's (NAS: MSFT) starting of its own Internet service provider, MSN. That obviously never happened, and for good reason.
Oh, and speaking of Microsoft, if Facebook is so serious about a differentiated phone offering, maybe it should call up its good buddy in Redmond and see what kind of a deal the two could cut. Further ties between the companies looks like a win-win proposition.
Finally, we come to reports over the weekend that Facebook could buy browser Opera. Apparently Facebook has a hole burning in its $7 billion bank account and wants to blow some money. Again, such a move doesn't seem to make a ton of strategic sense, and it illustrates how Facebook is too unfocused in its search of better monetizing its users.
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At the time thisarticle was published Eric Bleeker owns shares of no companies listed above. The Motley Fool owns shares of Microsoft, Facebook, and Apple.Motley Fool newsletter serviceshave recommended buying shares of Microsoft and Apple and creating bull call spread positions in Microsoft and Apple. The Motley Fool has adisclosure policy.We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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