The total number of Facebook shares available is about to increase by almost double, and the market seems to like it. The stock price is up nearly 6 percent in the first minutes since the market opened, defying conventional wisdom that prices should fall when a lockup ends.
What gives? It may be that investors have already accounted for the influx of new shares.
When companies IPO, they typically prevent current and former employees and other company insiders from selling shares in the months after the deal. When shares unlock, the new supply tends to knock prices down. In the case of Facebook, there are a lot of new shares coming on line: 804 million, compared to the existing float of 921 million shares.
But not only has the move in Facebook stock been tame in the walk-up to the unlocking of shares, options traders are making bullish bets on that the stock will rise even as more shares become available for trading. According to The Wall Street Journal, Facebook call options—bets that the stock will rise—are currently in vogue:
Among the most-active options contracts Monday were November $20 and $21 call options, which grant the right to buy shares at those prices by Nov. 17. With an average cost of 30 cents and 17 cents a share, respectively, those contracts look for Facebook to rise more than 2.3% and 6.6% by Friday to profit.
A top trade in the options market Tuesday was an outright bullish bet that Facebook shares will move higher in the weeks after the lockup expiration, trading back above the $20 level.
And at NetNet, John Carney talked to an options trader who thinks that the end of this particular lockup could actually lead shares to rise. The twisted logic: If former employees don’t rush to sell their newly unlocked shares, and the stock doesn’t fall as a result, short sellers will buy shares to cover their positions, creating positive momentum that could push the share price up as much as 50 percent.
Of course, it wouldn’t be the first time that Facebook stock moved against expectations. Investors piled into the stock at IPO hoping for a pop, only to watch share prices plummet in the first days of trading. Now, it seems that shares in the closely followed company are defying expectations again.