Salesforce Bow Out Deals Blow to Twitter Inc (TWTR) Option Bulls

Twitter Inc (NYSE:TWTR) has swung lower on reports, inc. (NYSE:CRM) will not place a bid on the microblogging platform

Oct 14, 2016 at 3:03 PM
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It's been a roller-coaster session for Twitter Inc (NYSE:TWTR), with the shares trading higher for most of the day on speculation Japan's SoftBank could be interested in purchasing the microblogging platform. This positive price action drew the attention of one confident options player in early action, who bet on a bounce back to $20 by March. Nevertheless, TWTR stock has since taken a turn for the worse -- down 6.4% at $16.70 -- after, inc. (NYSE:CRM) CEO Mark Benioff told the Financial Times the cloud company has "walked away" from its potential TWTR bid, saying it was not the "right fit."

Specifically, it looks like one speculator sold to open 20,000 March 20 calls ahead of the news for $1.85 apiece, while simultaneously buying to open a 10,000-contract lot of March 16 calls for $3.75 apiece. In other words, it appears this trader initiated a call ratio spread for a net debit of $0.05 per spread [($37,500 premium paid - $37,000 premium collected)/10,000 contracts].

The goal for the spread strategist is for TWTR to be sitting right at $20 at March options expiration, allowing her to pocket the maximum potential profit of $3.95 per spread (difference between the two strikes less the net debit). Risk, meanwhile, is limited to the initial cash outlay, should TWTR move even further south. However, a sharp move to the upside could result in theoretically unlimited losses, considering one of the short calls is uncovered.

More broadly speaking, TWTR has been a popular stock to trade options on. In fact, both call and put open interest are currently docked at a 12-month peak. However, the preference has been toward calls over puts, with roughly 1.9 million call contracts outstanding, versus 980,000 puts.

Echoing this is the action seen at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) in recent weeks. Specifically, speculators across these major exchanges have bought to open 533,980 calls on TWTR in the past 20 sessions, compared to 227,211 puts.

Drilling down, the 20 strike has been popular among front-month call players, too, with 31,424 contracts currently open here -- the most among any option in the standard October series. According to data from the major options exchanges, the vast majority of the activity has been of the buy-to-open kind.

While Twitter Inc (NYSE:TWTR) briefly explored territory north of this longer-term level of resistance as buyout rumors first surfaced, the stock quickly surrendered its perch north of here on speculation big bidders were walking away. Nevertheless, should the security close south of $20 at next Friday's close, the most the call buyers stand to lose is the initial premium paid.

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