The Hoax That Sent Twitter Inc (TWTR) Higher

A story claiming Twitter Inc (NYSE:TWTR) had received a $31 billion buyout bid has since been proven fake

Jul 14, 2015 at 1:10 PM
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Twitter Inc (NYSE:TWTR) popped 8.5% around midday, amid headlines the microblogging site had received a $31 billion buyout bid. The news story -- which was initially attributed to Bloomberg -- has since been proven false, and originated from a website designed to closely resemble Bloomberg. The stock is still riding high -- up 3.3% at $36.96 -- and option traders are betting on even more upside in the near term.

Taking a quick step back, TWTR calls are trading at almost four times the average intraday rate -- and are outpacing puts by a more than 3-to-1 ratio. In fact, nine of TWTR's 10 most active options are calls. Receiving notable attention is the weekly 7/24 38-strike call, where it seems safe to assume new positions are being purchased for a volume-weighted average price (VWAP) of $0.65.

Based on this average entry price, breakeven for the call buyers is $38.65 (strike plus VWAP). Profit will accumulate north of here, while losses are limited to 100% of the premium paid, should TWTR be sitting south of the strike when the weekly series expires at next Friday's close.

Widening the sentiment scope reveals speculators have been initiating long calls over puts at an accelerated clip in recent months. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), TWTR's 50-day call/put volume ratio of 2.67 ranks in the 74th annual percentile.

Echoing this call-skewed bias is TWTR's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 0.51. Simply stated, near-the-money call open interest almost doubles put open interest among options residing in the July series -- which expires at week's end.

Specifically, speculators have set their sights on the July 37 call, where 28,205 contracts are currently in residence -- peak call open interest in the front-month series. According to the ISE, CBOE, and PHLX, more than 22,300 calls have been bought to open here since May 18, meaning traders have been rolling the dice on Twitter Inc (NYSE:TWTR) to settle north of $37 at this Friday's close. Regardless of where the stock settles the week, the most the option buyers stand to lose is the initial cash outlay.

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