Why Bargain-Hunting Traders May Want to Consider Facebook Inc, Twitter Inc Options

Short-term options seem to be modestly priced on both Facebook Inc (NASDAQ:FB) and Twitter Inc (NYSE:TWTR)

by Josh Selway

Published on Jul 6, 2016 at 11:26 AM

Social media stocks Facebook Inc (NASDAQ:FB) and Twitter Inc (NYSE:TWTR) are both gaining today in the face of broad-market headwinds. At last check, FB has managed to add 1.2% at $115.34, while TWTR was up 0.5% at $17.22. This price action comes in light of rather noteworthy hires for both social media firms. Specifically, Twitter added former Facebook Chief Technology Officer Bret Taylor to its board, and Facebook hired a former Tesla Motors Inc (NASDAQ:TSLA) executive to work in its new research lab, known as Building 8. Meanwhile, based on a key volatility measure, it may not be a bad time to target short-term FB or TWTR options. 

First, taking a look back at FB's technical performance, the stock appears to have weathered its recent pullback, and is now consolidating atop its rising 100-day moving average -- a long-time level of support. Year-over-year, FB is up roughly 42%, touching a record high of $121.08 back in May. Still, options volume has been light on the stock. 

For instance, total option open interest for FB sits in just the 16th annual percentile, as traders on both sides of the aisle have been hesitant to place bets on the outperformer. More intriguing still is the fact that FB's Schaeffer's Volatility Index (SVI) of 20% ranks in the 8th annual percentile, meaning its near-term options are relatively cheap at the moment, from a volatility perspective. 

Those who have speculated on Facebook Inc (NASDAQ:FB) have taken an unusually put-focused approach. This is evidenced by the stock's 10-day put/call volume ratio of 0.75 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Ranking in the 96th annual percentile, this ratio indicates FB puts have been unusually popular in recent weeks. While shareholders may have purchased puts as protection, an unwinding among "vanilla" bears could potentially help the stock. 

As for TWTR, the stock is down more than 25% in 2016, even with the recent M&A speculation. In the options pits, open interest is extremely light on a relative basis, ranking in just the 8th annual percentile. And like FB, the options market is pricing in historically low volatility expectations at the moment, with TWTR's SVI of 47% sitting below 92% of all comparable readings from the past year. 

That said, unlike FB, Twitter Inc (NYSE:TWTR) options traders have been grabbing long calls over puts by an unusual margin in recent weeks. Specifically, TWTR's 10-day call/put volume ratio across the major exchanges comes in at a top-heavy 4.64 -- which puts it in the 95th annual percentile. Corresponding with this seemingly bullish behavior is a 20% decline in short interest on TWTR in the last two reporting periods, after peaking in May

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