Traders hit jackpot in $ZNGA

Zynga surged on takeover speculation today, yielding exponential returns on bullish option positions.

On Aug. 29, Investitute’s proprietary programs flagged the purchase of 16,300 October $4.50 calls for $0.07 to $0.10 with shares at $4.06. Volume was well above the strike’s open interest of 11,034 contracts, indicating that this was fresh buying.

Those calls traded up to $0.24 today, about 3 times their average purchase price. The stock rose 8.13% in the same time period, illustrating the kind of leverage that can be achieved with options.

Long calls lock in the price where a stock can be purchased, gaining with a rally and providing leverage to the underlying shares. The contracts can quickly lose value if the stock stalls or pulls back but also carry less risk than owning the shares themselves.

ZNGA spiked higher by 12.37% today to close at $4.36. The social-game developer rallied sharply after Bloomberg reported that an unidentified rival had expressed interest in a possible bid for the company.