Twitter’s stock run in the past month has been a sight to behold. IPO at $26, trade at $50 on day one. Back off to below $40 over the next few weeks. Then burst higher in the next month, moving almost 100% higher, and adding nearly $20 billion of market cap on no incremental news.
Incredibly, the short interest in the stock reached around 30% of the float at the most recent reading (though likely lower today after the stock’s relentless rise in the past 3 weeks). The hourly chart shows the persistence of this one month rally:
However, what has surprised me even more than the underlying stock move in TWTR has been the exceptional move in implied volatility.
TWTR was a stock that had a relatively low implied volatility in the 40’s in November even though trading history was non-existent. Considering the increase in short interest, I would have expected more traders to use puts instead of simply shorting the stock to express their bearish view.
Granted, total open interest is massively skewed towards puts (415k of puts outstanding vs. only about 260k of calls), but the low level of implied volatility last month looks like a big mispricing in retrospect:
One caveat here – the bulk of the increase in implied volatility has occurred in the last week, as the stock has moved from 55 to 70. Nonetheless, the one month straddle is now priced around $15, or 21% of current stock price, whereas it was closer to 15% of current stock price just 10 days ago.
Volatility generally moves lower as stocks move higher, with the big exception for stocks that start to move parabolic on the upside. In TWTR’s case, the 1 month implied volatility now nearing 100 is starting to look stretched, but I’d only be willing to sell volatility with structures that were defined risk. I’ll leave the open ended risk for more courageous (or foolish) souls.