Options Bears Are Flocking To This Social Media Stock Ahead of Earnings

Unlike Facebook, Twitter stock is plagued by pessimism

Managing Editor
Jul 26, 2017 at 1:20 PM
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Social media company Twitter Inc (NYSE:TWTR) is set to report second-quarter earnings tomorrow morning, and investors are keeping an eye trained on TWTR stock, which has historically struggled post-earnings. The shares could be under even more scrutiny tomorrow, after rival Facebook reports earnings after the close tonight. However, unlike Facebook stock, options traders and analysts are skeptical of TWTR stock ahead of earnings.

Twitter stock is down 2.2% to trade at $19.54 today. Since touching an annual low of $14.12 in mid-April, the shares have made notable headway, rallying more than 38%. What's more, the shares enjoyed a bounce off  their 80-day moving average in mid-June, and recently went on a record winning streak. TWTR stock could now find support in the $19-$19.50 area, which served as resistance in the first half of 2017.

twitter stock chart

Historically speaking, Twitter stock has averaged a one-day move of 9.0% in either direction in the session following its last eight earnings releases. As far as direction, TWTR stock gapped 7.9% higher after its late April earnings report, but has found itself in the red following six out of the last eight releases. This time around, the options market is betting on a wider-than-usual 15.4% swing in either direction for Friday's trading, based on the stock's at-the-money implied volatility data.

Although some analysts are starting to come around on TWTR stock, most remain overwhelmingly skeptical. Of the 23 brokerages covering TWTR shares, a whopping 22 rate it a "hold" or worse. 

Options traders appear to be echoing analyst sentiment. Put buying has been in vogue for some time now, ramping up to near annual highs relative to call buying during the past two weeks. According to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), TWTR stock's 10-day put/call volume ratio of 0.53 ranks in the 95th percentile of its annual range. 

Heading into tomorrow's report, there continues to be considerable interest in TWTR puts. Over 37,000 puts have traded already today, two times the intraday average, and on track to settle in the 85th percentile of its annual range. More specifically, the weekly 7/28 17-strike puts are garnering the most interest, with over 8,500 contracts changing hands. 

In conclusion, should Twitter report stronger-than-expected earnings tomorrow, there's plenty of pessimism that could unwind to drive additional gains. A round of upbeat analyst attention or an exodus of recent options bears could add fuel to TWTR stock's fire. What's more, social networking stocks are ripe for contrarian upside, according to recent data from Schaeffer's Senior Quantitative Analyst Rocky White.


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