An Update on Hedging Facebook

Recall that as soon as options started trading on Facebook, we scanned for optimal puts on it with Portfolio Armor and noted that it was expensive to hedge (“A first look at hedging Facebook“). We also mentioned that we’d seen examples before of high optimal hedging costs being a red flag for long investors, e.g., in the case of Zynga (“High optimal hedging costs offer another warning“).

As of today’s close, Facebook is down 31% from that warning (Zynga is down nearly 80% from its initial red flag in February). Nevertheless, it’s still expensive to hedge. In fact, as of today, it was too expensive to hedge against a greater-than-20% drop using optimal puts, because the cost of hedging it against that drop was itself greater than 20% of position value. This was the optimal put option contract to hedge 100 shares of Facebook against a greater-than-21% drop as of this afternoon:

https://p.twimg.com/AzUYGJCCEAAOoeB.jpg

Still extremely expensive, as you can see, suggesting options investors expect significant further declines in the stock.

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