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Options tied to swings in Facebook Inc. slid to their cheapest levels ever amid increasing optimism about the profitability of mobile ads.
Implied volatility for two-month contracts closest to the stock has fallen 28 percent to 48.56 since June, and last week reached the lowest level since the options started trading six months ago. While the stock is down 32 percent from its initial public offering, it has jumped 46 percent from its Sept. 4 low to $25.94, a four-month high.
Investors have been underestimating sales growth potential for the owner of the world's largest social network, Sanford C. Bernstein & Co. said Monday. The company last month reported sales that topped analysts' estimates and has introduced seven ad features created for smartphones and tablets since March.
"The stock became unduly depressed after the offering, but the investor community has been encouraged by the management's focus on business results," John Carey, who helps oversee about $200 billion at Pioneer Investments in Boston, including Facebook shares, said Monday in a phone interview. "The odds are reasonable that the company will be able to figure out a revenue generating model to monetize its impressive user base."
One investor bought 8,000 January 2013 $26 calls on stock Monday and sold the same number of $24 puts also expiring in January, according to Brian Overby, an options analyst at TradeKing Inc. in Charlotte, N.C. The strategy is known as a long combination because the puts sold help finance the purchase of calls.
"You really can't find a strategy where you are more bullish than that," Overby said in a phone interview. "You're selling a put which is a bullish trade and you're buying a call which is a bullish trade."
The implied volatility of 48.56 for two-month contracts closest to Facebook shares compares with 16.08 for the Technology Select Sector SPDR Fund, according to data compiled by Bloomberg. Ashley Zandy, a Facebook spokeswoman, declined to comment on the options trading.
Third-quarter sales rose 32 percent to $1.26 billion, Menlo Park, Calif.-based Facebook said on Oct. 23. That compares with the average estimate of $1.23 billion, according to data compiled by Bloomberg. Profit excluding certain items exceeded projections by a penny per share.
Sales will be $6.98 billion next year and $8.65 billion in 2014, Carlos Kirjner, an analyst at Bernstein, projected in a research report Monday. Analysts on average estimated revenue of $6.41 billion for 2013 and $8.12 billion the following year, according to data compiled by Bloomberg. Advertising on mobile devices and more targeted promotions for desktop users will help propel growth, he said.
Facebook has been trying to assuage investor concerns about how quickly it can make money from the growing portion of its more than 1 billion users who access the service on smartphones and tablets. The company has lost more than $34 billion in market value since holding the largest Internet IPO on record.
"Facebook went from one of the most-anticipated and most-loved stories to the biggest embarrassment," Eric Marshall, the director of research at Hodges Capital Management Inc., which manages more than $700 million, said in a phone interview Monday from Dallas. "There's a lot of skepticism around mobile strategy and the long-term business model. They're constantly having to reinvent themselves to stay on top."
Investors have held on to their shares after restrictions were lifted Nov. 14 on 804 million shares held by former employees and those who sold at the initial public offering in May, almost doubling the number of publicly available shares for trading. Facebook has rallied 16 percent since then. The shares are still 32 percent below the IPO price of $38.
The Chicago Board Options Exchange Volatility Index, known as the VIX, rose 2.4 percent to 15.50 Monday. Europe's VStoxx Index, a measure of Euro Stoxx 50 Index option prices, slipped 3.2 percent to 17.91 at 9:40 a.m. in Frankfurt Tuesday.
Short sellers have reduced bets that Facebook will slump. Bearish wagers against the stock have fallen to 3.9 percent of shares outstanding, a six-month low, from 15 percent in August, according to data compiled by Bloomberg and Markit, a London- based research firm.
"If you look at Google and Facebook and take the reasonable projections, they're going to capture all the mobile ad market share," Lawrence Haverty, a fund manager at Rye, New York-based Gamco Investors Inc., which oversees about $37 billion including Facebook shares, said Monday in a phone interview. "You have to be invested in these companies."