Name That Trade – $TWTR: Analyst Probe

by Dan November 11, 2014 2:55 pm • Commentary

Tomorrow at noon eastern, Twitter will be holding their first ever analyst meeting in San Francisco.  The options market is expecting a weekly move of about 5% in either direction.  Sentiment seems downright horrible heading into the event, which kind of has me interested in taking the other side of the trade as it is getting harder to find a soul to say a positive word about the company, management and the stock at the moment.  Here was my commentary from yesterday:

Every word out of CEO Dick Costolo will be highly scrutinized, and I suspect there is little that he can say that can win back investors, Wall Street analysts or the financial press/ tech blogosphere in the short-term.  Here is a pretty succinct compilation of the issues dogging Costolo from Business Insider, here.

I am by no means in the camp that Costolo has to go, and frankly I suspect it’s a tad premature, despite what seems like a revolving door of senior executives.  Let’s not lose sight of the fact that TWTR’s co-founder’s Jack Dorsey and Evan Williams chair and sit on the board, with a few massive venture capitalist who are all top shareholders.  I think it is safe to say that with the stock still up 50% from its IPO price a year ago, the board’s interests are clearly matched with investors.  This is not Dick Costolo’s board – it’s one comprised of the founders and largest shareholders.

Here is the problem though – Costolo has lost credibility with investors and some in the analyst community given his inability to clearly articulate a plan to re-accelerate user growth and engagement.  As regular readers know, we have a fairly bullish long term view for TWTR, as the current marekt cap does not reflect the scarcity value of such a unique social property. It is my view the world doesn’t get the immediate neccesity of TWTR’s product offereing, but they will.  I also suspect that Google or Microsoft will try to buy them at some point in the next couple years (more recent thoughts here and here).

I am positively disposed to the story, but fear there is little that management can and will say at the moment that leads shares back up to the mid to high $40s in the very near term.  At some point with a 3 handle I would close my eyes and buy shares as I did back in July prior to TWTR’s Q2 results (read here).

At this point let’s see where the stock is trading in the morning prior to the event but I wanted to lay out a few trades that I would be inclined to trade depending upon risk tolerance and conviction:  

Ratio Call Spread, low probability of success, but low risk on a downward move, or a move up of up to 16%, but risk if stock has a massive gap to upside (above 45.94): 

TWTR ($39.58) Buy Nov weekly 42/44 1×2 call spread for .06

-Buy 1 Nov weekly 42 call for .24

-Sell 2 Nov weekly 44 calls at .09 each or .18 total

Break-Even on Nov weekly Expiration:

Profits: between 42.06 and 44  make up to 1.94, payout trails off between 44 and 45.94.  Max gain of 1.94 at 44, up 11%,

Losses: losses of .06 below 42, and losses of .06 and penny for penny above 46, up 16%



For those who want to define their risk:

TWTR ($39.58) Nov weekly 40/42.50/45 Call ButterFly for .45

-Buy 1 Nov wkly 40 call for .75

-Sell 2 Nov wkly 42.50 calls at .18 each or .36 total

-Buy 1 Nov wkly 45 call for .06

Break-Even on Nov weekly Expiration:

Profits: between 40.45 and 44.55 make up to 2.05 with max gain of 2.05 at 42.50

Losses: up to .45 btwn 40 & 40.45 and btwn 44.55 and 45, with max loss of .45 below 40 and above 45



For those who are looking to take a longer view than just tomorrow’s event:

TWTR ($39.58) Buy the Jan 35/45 Risk Reversal for even money

-Sell the Jan 35 Put at 1.20

-Buy the Jan 45 call for 1.20

Break-Even on Jan Expiration:

Profits:  gains above 45

Losses: below 35

PnL will rise as stock gets closer to long call strike, and decline as stock gets closer to short put strike.  This trade structure has 52 deltas to it, so in the near term the PnL will move .52 for every dollar move.  

WE WILL TAKE ANOTHER LOOK TOMORROW PRIOR TO THE EVENT, and decide how to express a contrarian bullish view. It is our sense that poor sentiment and an oversold stock could set up for a short squeeze.