Making Sense of the Twitter, Inc. (TWTR) Earnings Mess

Twitter Inc's (NYSE:TWTR) earnings were released ahead of schedule, something that's becoming more common

by Adam Warner

Published on Apr 30, 2015 at 8:23 AM

As you may have heard, Twitter Inc (NYSE:TWTR) reported earnings "after" the close on Tuesday. At least, they intended to report earnings after the close.

The options board priced in about an 11% earnings reaction. On the surface, that seemed about in line with past TWTR earnings moves. Although it's a new company, so there are only five quarters of history to go on.

Well, as it turned out, the stock barely moved on earnings. That is, if you start measuring from after the close:

150430warner1

Alas, those red candles on the chart above start a little after 3 p.m. ET. This, from The New York Times:

"Selerity, a financial analytics firm, recently released a study about how news events break on Twitter. On Tuesday, however, Selerity made news about Twitter.

"Three seconds before 3:08 p.m. on Tuesday, Selerity tweeted what looked to be an early release of Twitter's disappointing earnings release, nearly an hour before Twitter was scheduled to announce it to Wall Street.

"Six seconds later, Selerity says, shares of Twitter plunged. The New York Stock Exchange briefly halted Twitter trading as the company sorted out the mess. By 4 p.m., when the markets closed, the stock had fallen nearly 20 percent.

"This is the business of Selerity. It combs the Internet for any signs of early financial information from companies like Twitter, and offers its services to high-frequency traders who could, potentially, act quickly to make money on that information."

Well, OK then. If you're of the belief that we mere humans have little chance in today's marketplace, this surely doesn't help. We noted recently that bots now exist that can read news and use it to produce an options strategy to benefit from in a nanosecond. This is a bit of a variation on that theme. Selerity didn't simply find the news on a wire or Twitter feed somewhere; it literally gathered it.

Ryan Terpstra -- founder and CEO of Selerity -- said that his company's technology detected an updated link on Twitter's Investor Relations Web page, and followed the link to a document posted on the open Internet to gain access to the information. It sets up some odd dynamics.

How does one know whether the information is accurate? It seems possible that someone's going to somehow "leak" bad numbers, and then fade the move. Or, alternatively, trick a system like Selerity into thinking an "old" report is new. And then, it could maybe fade the errant move they created.

Yes, there is some precedent.

Long story short, be careful following moves like this. By the time you figure out what just happened, it's too late. And, it might not prove correct anyway. If you plan to use options to position for an earnings report, don't wait until the last minute. These kind of pre-release releases happen more and more often nowadays.

And the best advice is to always use contract neutral strategies so as to at least cap losses. An iron condor is a great way to generate some premium, and not get carried out if you're wrong. Simple call- or put-spread sales work well, too, if you have a directional opinion.

There was always risk in earnings plays, but you had a better chance to play some defense in the stock. In 2015, with news-reading trading bots, I'm not so sure there's much of a window.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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