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Option Bulls Take Aim at Twitter Inc (TWTR)

Twitter Inc bulls bought newly front-month calls on Monday

by 5/20/2014 9:23 AM
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Option Brief: Twitter Inc (NYSE:TWTR) emerged on the M&A radar yesterday, amid reports the microblogging site is mulling a bid for audio-sharing service SoundCloud. While TWTR has underperformed the broader S&P 500 Index (SPX) by 44 percentage points during the past three months, options traders on Monday rolled the dice on a short-term rebound for the shares.

The equity saw roughly 49,000 calls cross the tape, compared to 27,000 puts. Most active was the June 33 call, where more than 8,600 contracts changed hands -- roughly three-quarters at the ask price, suggesting they were bought. Plus, open interest surged by more than 5,900 contracts overnight -- the most of any strike -- underscoring our suspicions of bullish initiations.

The volume-weighted average price (VWAP) of the calls was $1.37, meaning the buyers will reap a reward if TWTR is docked north of $34.37 (strike plus VWAP) at the close on Friday, June 20, when the newly front-month options expire. Risk, meanwhile, is capped at the initial premium paid, should the shares remain south of the strike through the option's lifetime.

It's worth noting that short interest on TWTR represents nearly 15% of the stock's total available float. While some of the recent out-of-the-money call buying may be attributable to short sellers looking to hedge, yesterday's affinity for June 33 calls was likely the result of "vanilla" bullish betting, considering the shares -- last seen at $32.07 --are so close to the money.

Regardless of motive, now is an opportune time to speculate with TWTR's front-month options. The stock's Schaeffer's Volatility Index (SVI) of 47% sits just 12 percentage points from an annual low, suggesting the equity's short-term options are attractively priced right now, from a historical standpoint.

On the charts, Twitter Inc (NYSE:TWTR) has surrendered roughly half its value in 2014, and touched a post-lockup record low of $29.51 on May 7. The shares are struggling to surmount their 10-day moving average, which hasn't been toppled on a daily closing basis since April 24. Off the charts, Twitter will host its annual shareholder meeting tomorrow, where investors will likely seek answers on the SoundCloud buzz.


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