TWTR touched $50 this morning for the first time since March, continuing the uptrend that has been in place ever since post-lockup low from early May:
The $50 level is an important level from the obvious psychological round number perspective, but it is also almost right at the midpoint of the lifetime range for TWTR since the November IPO. It also happens to be the high of the stock on the first day that TWTR was publicly traded.
It’s natural that TWTR would find some resistance here given the large amount of overhead supply. We bought TWTR stock prior to the late July earnings report, with the following rationale from Dan:
TRADE – Buying to Open TWTR at $38.65
But here is the thing, I think Twitter is a very unique web property, and its current $23 billion market cap does NOT reflect its scarcity value. What do I mean by this? Well, the $19 billion price tag Facebook paid for WhatsApp is exhibit A, most large internet companies have a some obvious holes when it comes to social media, like Google, MSFT & Yahoo. What Twitter is really good at is real time search, and Google who is the king of web search has a realtime search problem, not to mention a fairly horrible social media offering in Google Plus. Before this bull market is over I suspect we will see a bidding war for Twitter due to its scarcity value and social relevance, NOT for what they have or have not been able to demonstrate as it relates to ad revenues, user growth or engagement, but for the potential!
We are still optimistic about the long-term investment thesis given the unique nature of Twitter’s platform. However, the technical situation after a very strong 1 month rally in the shares has us considering potential options overlays against our long stock position with the stock near $50.
Implied volatility in TWTR made a lifetime low in mid-August after volatility dropped following the earnings event:
Our first inclination was to overwrite our TWTR position by selling some upside calls. But the low level of implied volatility has reduced the risk/reward of that option somewhat, as the Oct18th 52.5 call at 1.70 offers a bit more than 3% in premium for the next 6 weeks. Not bad, but it caps the TWTR upside at $54.20.
The other issue is that TWTR has had strong upward momentum in the past couple of weeks, which indicates aggressive buying. It’s rare that a stock sells off straightaway after such momentum. If TWTR does move lower from here, we imagine there will be a retest of $50 in the coming days or weeks, so we are going to hold off from doing anything here.
However, if we see the stock through $50 we’ll possibly start to look into some options overlays on the position. Somewhat counter intuitively, vol could start to pick up in that situation as well.