A week ago, when the stock was $45, I put on a trade in TWTR with the idea that the stock would likely make a run back towards its IPO day highs of $50 by the end of the year (New Trade $TWTR: Un-following December, Favoriting January). Silly, silly me, I was lulled by the the prior few weeks of range bound trading in the stock to think that despite lots of controversy over the stock’s valuation, that it could possibly trade in a rational manner. Since last Friday’s close TWTR is up 27% in almost a straight-line, tacking on about $8 billion in market cap, not likely to help the valuation debate (currently trading about 50x next years expected sales).
The violent short term upward move made it close to impossible for this trade to become profitable so yesterday when the stock was a little above $55 I closed it for what I paid: (Trade Update $TWTR: So Right, Yet So Wrong – Closing Call Calendar for a Wash) No harm, no foul, but obviously a massively missed opportunity.
SO NOW WHAT? We have gotten a lot of questions on this weeks move and to be fair there are few companies/stories that are worthwhile looking to as some sort of guide for how TWTR may trade in the next few months. While FB is the obvious choice let’s first look at LNKD as it was the first real social media stock to go public back in May 2011.
After LNKD’s May 2011 IPO the stock was very volatile after its initial 150% pop from the IPO price, it then declined 50% over the next month, then rose almost 100% in its second month and then spent the next few months declining 50% again before it put in its all time low. I has since gained 350% from the 2011 lows. Yes that gave me a headache too.
Now let’s look at the first year of FB after its infamous IPO in May 2012. The stock was more than cut in half over the next 4 months, only to gain nearly 90%, then decline again 30% and then rocket more than 130% to the mid to low 50s.
So now to TWTR, just 28 trading days of data, so not particularly useful, but the stock had a similar sort of 100% pop from its IPO price like LNKD, the drop shortly after was much shallower to LNKD and FB at only about 22%, but the almost 50% gains off the lows in just a couple weeks has been sort of eye-popping.
So the conclusion is fairly simple, stocks will fluctuate, but Social Media stocks with massive price to sales multiples will fluctuate a LOT! As I said in my initial trade post the next real catalyst for TWTR shares (aside from surprise product or competitive announcement) will be their Q4 earnings that should be reported in late Jan or early Feb. It is our sense that TWTR has ramped up ad insertion over the quarter in an effort to put up at least a beat to Wall Street consensus, something that LNKD nor FB did in their first quarter out of the gates from their IPO.
Cause we are the “Options Guys” we want to take a quick look at 30 day at the money Implied Volatility (IV) of each of the above stocks since inception and see if we can take away anything from FB and LNKD’s vol history and apply it to trading TWTR options (which we clearly did not nail out of the gate).
First LNKD, stocks IV got as high as 102.80 in the months after its IPO in the throws of its first decline and is now in the mid 30s:
Then shifting to FB, this one is a bit interesting, IV was super high out of the gate, then started to trend down after the expected spikes into earnings and the crushes post. The spike to new highs in Oct came prior to the stocks Q3 report as traders desperately reached for options to either speculate on further gains as the stock made new highs every day or buy puts to protect gains. IV recently topped out at 77 and appears to be settling in below 40 and could likely be back to the mid to lows 30s.
Looking at TWTR’s IV since options were listed a few ago is not very useful, except to notice that as the stock has made new highs, so has IV, up 20 points in the last two weeks to the highs now of 65. IV is likely to stay bid into the company’s Q4 report, and Feb options will likely be a buy on dips situation from a vol standpoint, but not something that you would want to hold into the print.
TWTR 30 day at the money IV since IPO:
As with many high flying, high actual volatility names, options pricing seems to get more exciting the higher the stock goes. Once it becomes easier to price, based on things like, I dunno, earnings, the options tend to get a little less exciting. Less exciting is probably better for investors looking to make directional bets, while more exciting is better for those inclined to be net sellers of options, as the premiums and the spreads will be higher and wider. That being said, rolling calls against longs can look attractive, but not if you have to continually buy back your overwrite when the stock is in a parabolic run.