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Option Brief: Twitter Inc's (NYSE:TWTR) technical troubles have been fodder for the Street for some time now, with the shares off 50% year-to-date. This downtrend continued on Monday, when the stock surrendered more than 2% to close at $31.75. In spite of this, calls emerged as the options of choice, outpacing puts by a nearly 3-to-1 margin. Diving deeper reveals a number of speculators bet on a quick rebound by week's end (although, a handful of dissenters used some of these calls to gamble on short-term churn for the microblogging name).
Receiving notable attention was the equity's weekly 6/6 32.50-strike call, where 9,449 contracts traded, mostly at the ask price, suggesting they were bought. Implied volatility (IV) rose 3.4 percentage points, and open interest rose the most of any strike overnight, making it safe to assume that new bullish positions were initiated.
Breakeven for yesterday's call buyers at this Friday's close is $33.16, which is the strike plus the volume-weighted average price (VWAP) of $0.66. Gains will accrue with each notch above this mark TWTR settles at week's end. Should the stock expire south of the strike price, the most the speculators stand to lose is 100% of the premium paid.
Elsewhere, the security's weekly 6/6 33-strike call saw the most action -- with 18,992 contracts on the tape by the closing bell. This out-of-the-money call saw activity on both the bid and the ask side, IV rose 3.2 percentage points, and open interest increased overnight. Summing it all up, it appears there was a healthy mix of sell- and buy-to-open activity, respectively.
By selling to open the calls, speculators expect Twitter Inc (NYSE:TWTR) to keep churning south of $33 through Friday's close. This will allow the options to expire worthless, and the speculators to pocket the initial premium collected as their maximum potential reward. (Should TWTR rally above this mark, though, they could be at risk of being assigned.) Meanwhile, at-expiration breakeven for the call buyers is $33.63 (strike plus VWAP of $0.63). Similar to the aforementioned option buyers, profit will accumulate with each additional step north of here TWTR is resting at Friday's close, while risk is limited to the initial cash outlay.