Facebook’s stock price falling, investors motivated to hedge their risk

Facebook’s initial public offering had created a hype in the financial market and its price range for shares was increased just before the IPO as the demand for Facebook shares increased greatly. However after a few days of the IPO the share price of the company’s stock has dropped and the price has reached below 30 dollars per share. The company faced lawsuits after the IPO and some technical issues in trading that might have affected the stock price.

The company’s valuation has also decreased as a result of the drop in share price. The management of Facebook opposes the lawsuits on them and claim that they are not justified. They are determined to move forward and prove that their networking site has become the one of biggest success in the IT business history.

The decrease in the share price has made the investors more cautious and now they are trying to hedge their risk in case of further drop in the price of Facebook shares. "The majority of the participants have been selling calls and buying puts in Facebook," Steve Place who is the founder of options analytics firm investingwithoptions.com said as reported at Yahoo News.

The uncertainity of the share price has resulted in apprehension for the investors. They want to minimize their loss in case of further decline in the price. So they are going for various hedging options and trying to become safe from bigger losses. "As shares sold through $30 at noon on Tuesday, put buying picked up with some purchases of the August $29 strike puts of more than 1,000 contracts at $3.30 per contract. The trade would be profitable at August expiration if shares were to close below $25.70," Trade Alert President Henry Schwartz said as reported at Yahoo News.

The money market is full of such risks and therefore methods have been developed to limit the losses of the investors. These methods are based on future price trends and provide immunity to the investors if the share price moves towards continuous decline. Facebook’s stock was expected to rise after the IPO and so this recent drop is taken very seriously.

Put options are gaining popularity as they give a right to the buyer to sell the shares owned at a given price by a given date. So the investors of the Facebook stock are protecting themselves from further losses through the put options. If the share price continues falling, they would sell them at the specified price and reduce their loss.