Big Printin’ – Dotting Our T’s: $TWTR, $TMUS

by Dan February 17, 2016 4:13 pm • Commentary

There were a couple interesting rolls, one bullish and one bearish that caught my eye today in the options market.

First in Twitter (TWTR).  The stock has had a pretty healthy run since declining almost 5% on February 11th, the day following what investors viewed to be mildly disappointing Q4 results. Since making a new all time intra-day low Thursday morning at $13.91, the stock is up about 25%!

Today when the stock was $17.20 at 10:30 am, a trader sold to close 11,000 of the March 24/29 call spread at .03, its was basically worthless, and bought to open 11,000 of the June 21 /26 call spreads, paying 91 cents to open, or about $1 million in premium.

This trade breaks-even up at $21.91 on June expiration, up about 27% from the trading level. What’s interesting about the trade is that the upper strike of the call spread is at the Nov 2014 IPO price of $26, not particularly an optimistic strike, but as a shareholder I’d be happy to see the stock at $26 in 4 months.

A quick look at the chart shows the fairly steady downtrend of lower highs and lower lows. It’s been getting a bit more fierce since the massive gap last spring. If the stock could get a head of steam, and get through the sharp downtrend, a close above $20 could be in the stock’s near future.

TWTR since Nov 2014 from Bloomberg
TWTR since Nov 2014 from Bloomberg

Sentiment in the stock is fairly downbeat, with short interest near 10% of the float. Wall Street  analysts remain downbeat with 14 Buy ratings, 25 Holds and 2 Sells, with an average 12 month price target of $21.  


Earlier today in CC’s post on T-Mobile (TMUS) he referred to a large trade in the market, that seemed to be rolling a defensive positioning for an existing holder.

Shortly after the open, when TMUS was $36.71, a trader bought to close 25,000 Feb 38 calls for 55 cents, and sold to close 20,500 Feb 36 puts at 30 cents.  This was likely a collar.

But with the stock up post earnings, and just two trading days to Feb expiration, the trader sold to open 25,000 May 36 calls at $3.35 and bought to open 25,000 May 31 puts for $1.  So let’s break this new trade in May down.

My assumption is that this collar is against 2.5 million shares of stock. Let’s use the price of $36.70.   The May 38 / 31 collar was executed for a $2.35 credit.

If the stock is below $38 on May expiration, then the trader will take in $5.875 million, but will also have gains of the stock up to $38, or $1.30.

If the stock is $38 or higher the trader would have their stock position called away, but would have effectively sold it at $40.35 (the short call strike, plus the premium received for the purchase of the collar).

The $2.35 credit received for the collar will also serve as a buffer to the downside, in this case the trader would have protection on their 2.5 million shares of stock down to $34.35 (the current price less the $2.35 premium received).  Between $34.35, the trader would have losses, down to $31, the level where the put protection will kick in.

So to do a little math, on May expiration, the max loss the trader can lose on their 2.5 million share holding is $3.35, or $8.375 million, with the max potential gain of $3.65, (the difference between current price of $36.70, the short call strike $38, and the $2.35 premium received), or $9.125 million.

I guess the most important part of this trade is that it immediately makes money, with gains capped up 10%, while providing an immediate buffer.