JPM), underwriters and majority owners (hello Mr. Mark Zuckerberg) continue to allow these stocks to needlessly fall. At the pace Facebook is falling it becomes self-fulfilling in an endless feedback loop -- the next day it will fall further. Anytime anything demonstrates a pattern of falling prices (it only takes three days to "make a pattern" in many investors' minds), the natural tendency is to wait for better prices. (See my Facebook article How to Catch a Falling Knife.) If it was smart to sell the shares at $38, surely it must be smart to buy some back to support the market at $26 a share? Will some of the millionaires and billionaires of the Facebook initial public offering lend price support to the stock that made them rich? LinkedIn ( LNKD) also had some trouble coming out of the gate. However, LinkedIn found its footing and moved on to trade above the original IPO price. Unlike LinkedIn, though, Facebook's ability to generate higher revenue and profits is in serious doubt. That's all the more reason for participants of the Facebook IPO to put back a few dollars and at least get the media attention off of Facebook. Some analysts have written that $25 is the golden price to enter a position with Facebook. I disagree. I believe the best way to look at Facebook is that the price has no floor in a market full of emotion. Trying to pick the very bottom is a fool's errand and full of peril. (See my article Facebook's Lessons in How Not to Play the Game.) A better approach for those wanting exposure is to sell cash covered put options instead of buying the stock outright. The fear premium is sky high for options, creating a sellers' market. By selling put options you mitigate your risks, lower the volatility and put the odds into your favor. Best of all, in this falling market; you don't have to pinpoint the bottom of the move.
In LinkedIn's case it took six weeks of trading before investors became comfortable holding on, and it's traded like a rodeo since. Using options to reduce volatility and capture time premium has worked out well with LinkedIn. LinkedIn is trading for double the IPO price; however, it opened for exchange trading at $82.50. With LinkedIn at the time of writing trading for $92, option sellers would have had a much easier time sleeping at night and more money in their trading account (option trading doesn't begin at the same time as an equity IPO, but considering the stock price opened near $89 at the beginning of option trading adds credibility to the concept). Zynga is a whole different breed. Zynga is tied so tightly to Facebook that it resembles Wile E. Coyote tied up to a red ACME rocket after lighting the fuse with a match. Wherever Facebook goes right now, you can find Zynga. (See my article Tune out Facebook: Tune in Sirius, Pandora.) Zynga is incredibly oversold technically. Few catalysts increase the value of options like fear of falling prices. Both Facebook and Zynga are full of market fear currently, driving option premiums higher. All June monthly puts are priced at or above 90 percent implied volatility. Even for a $5 stock, the implied volatility is large. As bearish as I am with Zynga, the combination of super-sized option premium with an oversold stock means I may put my big toe in and sell $5 and $4 July Zynga put options during Wednesday's open. I am not as bearish with Facebook. However, I don't believe Facebook is as oversold as Zynga. With that being said, Facebook is mildly oversold, and option premiums are attractive. I would also like to believe those that made so much money off the Facebook IPO will grow tired (and hopefully a bit concerned) of the IPO blowback and begin to support the stock price. DISCLOSURE: At the time of publication the author did not hold a position in any stock mentioned.