Event: TWTR reports Q4 results tonight after the close. The options market is implying about a 11.5%* one day move vs the 4 qtr avg since going public about 15%.
*with the stock at $42 the Feb 6th weekly $42 straddle (the call premium plus the put premium) is offered at about $4.80, if you bought that you would need a move above $46.80, or below $37.20 to just break-even, or about 11.5% in either direction.
Sentiment: despite the stock’s 17% year to date gains, the stock is down 24% from the October 2014 highs, and down 37% from the all time highs. The Wall Street analyst community has been turned around on the stock on more than a couple of occasions in the last year, and now they seem downright confused with 17 Buy ratings, 21 Holds and 3 Sells with an average price target of about $50, or about 18% higher than current levels. Short interest sits at about 7% of the float.
Options Open Interest: the call to put ratio is about 1.75, with a total of 750,000 calls to 430,000 puts, with calls making up the top 12 largest strikes of open interest, with the two largest strikes 33,000 of the March 36 calls, and 32,000 of the March 50 calls.
Volatility Snapshot: Short dated options prices have risen to about 70% for 30 day at the money implied vol, very near levels of the last few quarters:
Despite what seems like a large implied move of almost 12%, given the stock’s past post earnings movement, and the generally controversial nature of the stock, the move seems pretty fair. Meaning it doesn’t seem particularly expensive, and certainly not cheap, and gun to my head I guess I’d rather own it than be short it.
Price Action / Technical: The one year chart below shows the recent breakout above $40 which has been near term resistance, and just today above the stock’s 200 day moving average, a momentum indicator the stock has not been above since October:
In the near term, $35 on the downside, or about 16% lower should serve as staunch support, but a break below those levels and the stock has no real support until the low $30s.
My Positioning: In early January I bought the stock at $37.60 (read here), and on Monday I collared my long stock position by selling a June 52.50 call and buying short dated protection in the form of Feb 6th weekly 37.50 put for even money (read here).
My View: My bullish view is not based on a short term in Twitter, I suspect that the company has not made a ton of progress on the monetization, engagement or growth of users. But I believe they are going in the right direction and ultimately some of the new features recently released (video, group messaging, while you were gone) should help expand their audience and engagement. Media reports this morning that Google and Twitter will enter a deal where Tweets will show up real time in Google searches reinforces my belief that Google should not just partner with Twitter but they should own them and that this deal (if consummated) is recognition that Google has a real time search problem and this is the first step in righting the ship. As far as Twitter, their main issue is mainstream usage and they feel that a more real-time presence on Google results could help showcase their real time news advantage to people that may not be familiar with that aspect yet.
I would also add that Twitter could help shore up Google’s waning efforts in Social Media, and a non-existent mobile messaging platform that competitors like Facebook have embraced in a big way. So my view has little to do with how quickly Twitter can grow MAUs (monthly active users) or their ability to show how much they can make on each user, but the scarcity value of the social/messaging property and why they could reach much greater scale inside or part of a larger media/web entity like Google.
So the stock has rallied into the print, and I fear the sentiment has possibly gotten too positive relative to what the company may report, which is why I slapped on some protection that covers me below my purchase price for the event, but allows for significant upside.
We will be sure to follow up with some trade ideas.