Schaeffer's Trading Floor Blog

Twitter Inc (TWTR) Traders Not Spooked By Pricey Options

Put sellers target TWTR as volatility increases

by 12/10/2013 11:42 AM
Stocks quoted in this article:

Twitter Inc (NYSE:TWTR) has only been an optionable stock since Nov. 15, but demand for these derivatives has ramped higher during the subsequent weeks. Yesterday, for example, the stock was among the 10 equities seeing the heaviest options volume. Against this backdrop, 30-day, at-the-money implied volatility (IV) has spiked to new high. In a similar vein, Schaeffer's Volatility Index (SVI) has rocketed from 0.43 on Dec. 3 to 0.56 currently.

Who Benefits From Higher Volatility?

While rising implied volatility readings mean higher premiums for option buyers, they are a welcome development for option sellers, who can collect more at the outset of the trade. Most active in Monday's trading was the June 30 put, where the majority of the roughly 11,500 contracts traded at the bid price. The lion's share of this volume translated as new open interest overnight, suggesting the puts were sold to open for a volume-weighted average price (VWAP) of $1.74 per contract.

Strategy Pros and Cons

If Twitter -- currently sitting at $51.89 after hitting a new record high of $52.58 this morning -- stays above $30 through the next six-plus months, the put sellers will retain the entire credit collected as profit. If TWTR stumbles the roughly 42% to breach the $30 mark, the put sellers who continue to hold their positions will likely be obligated to buy Twitter Inc shares for $30 each, no matter how far they continue to tumble. The closest TWTR has gotten to this round-number level is $38.80, tagged on Nov. 25.

High Premiums Don't Scare Off Speculators

So far today, Twitter Inc (NYSE:TWTR) ranks seventh among the most active optionable names, and volume is on pace to hit a new record of more than 300,000 contracts, per Trade-Alert data. IV continues to climb, up nearly 7.6% to 55.1%. Most active so far are the slightly out-of-the-money weekly 12/13 53-strike calls, where volume outpaces open interest (suggesting the initiation of new positions), but the activity appears to be a mixture of buying and selling. In order to own these calls, which expire at the end of this week, traders are paying a VWAP of $0.73 per contract. Breakeven for the call buyers is therefore $53.73, or a 2.2% bump higher from the all-time high tagged earlier today.

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