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Twitter Inc (TWTR) Traders Wager On More Upside

Twitter Inc is struggling to close a bear gap, but option traders are optimistic

by 5/29/2014 11:17 AM
Stocks quoted in this article:

Twitter Inc (NYSE:TWTR) is up 1.1% at $34.13, after Cantor Fitzgerald boosted its opinion on the microblogging concern to "buy" from "hold" -- echoing a move from Nomura on Wednesday. What's more, bulls are rushing TWTR's options pits in early action, betting on the stock to break north of resistance in the $35 neighborhood.

So far, about 89,000 TWTR calls have changed hands -- more than twice the intraday norm -- compared to roughly 37,000 puts. Short-term options are in demand, as the equity's 30-day at-the-money implied volatility (IV) has jumped to 50% from 44.4% at Friday's close, and eight of the 10 most active options are calls expiring within the next few weeks.

Attracting the most attention has been the weekly 5/30 35-strike call, where more than 9,500 contracts have traded, primarily on the ask side. IV at the strike has skyrocketed 11.1 percentage points, and volume has surpassed open interest, hinting at newly bought bullish bets.

The volume-weighted average price (VWAP) of the calls is $0.50, meaning the buyers will make money if TWTR is docked north of $35.50 (strike plus VWAP) at tomorrow's close, when the options expire. Profit potential is theoretically unlimited north of this breakeven point, while risk is capped at the initial premium paid for the calls. In fact, now is an opportune time for buyers to roll the dice with TWTR's short-term options, as the stock's Schaeffer's Volatility Index (SVI) of 49% stands 15 percentage points from an annual low, pointing to historically inexpensive premiums at the moment.

Technically speaking, though, TWTR has struggled to surmount the $34-$35 area in May, and could flail as it attempts to close its bear gap from earlier this month, before which the stock was sitting north of $38. What's more, nearly 8,900 contracts are perched at the June 35 call, which could exacerbate resistance in the short term.

From a sentiment standpoint, calls were already the options of choice among Twitter Inc (NYSE:TWTR) speculators, despite the stock's year-to-date deficit of more than 46%. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security sports a 10-day call/put volume ratio of 2.44. In other words, option buyers have picked up more than two TWTR calls for every put during the past two weeks. Should the stock backpedal in the face of resistance, a mass exodus of option bulls could place added selling pressure on the shares.

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