Twitter (TWTR) – A Little Birdy Said What?

by CC September 23, 2016 3:43 pm • Trade Ideas

The big story in the market today is the move higher in TWTR shares as it’s being reported that there is some interest in the company from a few of the big boys. From CNBC:

Twitter shares surged Friday after sources said the ailing social media company moved closer to being sold.

The sources said the company has received expressions of interest from several technology or media companies and may receive a formal bid shortly.

The potential suitors include Google and, among other technology companies, sources said.

Twitter is up 20% on the news. Dan has written countless times that a takeout was the most likely end game for Twitter shares after the pummeling they’ve taken in the past year and a half. Here’s some of the most recent, from July 26th:

It has long been my view that Google, in particular, should buy TWTR. It would solve a few of their core biz’s massive blind spots like real time search. It also adds another in app search in mobile, helps with their lack of social offerings, adds an opportunity to leverage YouTube videos (and live video) and helps with their lack of short messaging app (to name just a few!).

From Aug 4th:

My views on the replacement value for the company’s brand, 300 million strong monthly active users, tech and $2 billion plus advertising revenue base are simple… the company, with an $11 billion enterprise value is cheap for a strategic buyer like Google (GOOGL), to name just one. But it seems that the board is not likely to not sell the company prior to the upcoming one year anniversary of the return of founder and second time CEO Jack Dorsey

And from Sept 1st:

It’s my belief that TWTR will not be a standalone forever, and I consider Alphabet the most obvious buyer as TWTR checks a few boxes for them in mobile messaging / social and most importantly one of Google’s few blind-spots with real-time search.

In some recent posts on the subject we’ve detailed what to do in a stock where you think nothing can possibly go right except for a takeout. Options are a great way to define that sort of asymmetrical uncertainty. From July 26th:

With the stock at $18.30, you could look out to December expiration (also catch the Q3 earnings report that will come in late Oct) and sell to open one Dec 15 put at 95 cents, and buy to open one Dec 23 call for 95 cents.

If you were a bit more convicted you could sell a the Dec 16 put at $1.30 and buy the Dec 20 / 27 call spread for $1.30.

And from Aug 4th:

With the stock at $18 I would look out to Jan17 expiration  and sell the Jan17 15 put at $1.05 and buy the Jan17 20 call for $1.65 and sell the Jan17 30 call at 20 cents.

All of these trade ideas were based on the idea that buying and owning TWTR stock was just too painful as it seemed like it could never catch a break on the way down. And so if you only wanted to be there for a potential takeout, you needed time and you didn’t want to worry about the day to day gyrations in the stock. Each trade defined a range where you basically didn’t care, but a much lower level you’d be willing to be long and upper strikes to be there for the big on the upside on news of the company getting bought.

So now with the stock 22.70, all these trades ideas are in great shape. They did exactly what they were supposed to do. Set it and forget it and be happy on a day like today with a headline out of nowhere. As for what’s next in the stock? No one knows. At some point the puts can be closed on all these trade ideas and perhaps a roll to higher strikes is in order at some point. That books the profits from the original move and stays in the game for more headlines.