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Twitter Trading Frenzy

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I tweet. The White House tweets. Celebrities tweet. Investor relations departments tweet. While the numbers are a moving target, recent stats show that in seven years Twitter (TWTR) has built up a base of about a billion users creating about half a billion tweets per day, with peak loads (sounds like market data!) near 143,000 tweets per second!

For the options markets, Twitter has been a superstar product, going from zero to 900,000 contracts in the 28 trading days since options were listed on November 15! The underlying has been a superstar as well- with a flawless IPO at $26 on November seeing a 90+% first-day gain that had impressive staying power, sliding back a few bucks to $39 before rocketing higher this month (yes MONTH) to a near doubling in value and a brief stint above $75 the day after Christmas.

With 904,000 contracts trading yesterday, Twitter options blow past all other single-stocks for total volume, including Facebook (FB), Apple (AAPL), Tesla (TSLA), in fact only the SPDR S&P 500 ETF (SPY) traded more contracts than TWTR on the day.

While hundreds of names are blasting through new highs into year end (502 new highs set yesterday out of the 4,100 we track), TWTR is obviously a special case of a young hot story stock that may or may not turn out to be a long-term profit machine. My view (and that of most analysts I follow) is that TWTR share price is way ahead of itself and has put the firm into a total market-cap situation (around $38 billion) that makes little sense. One aggressive trade yesterday hit early in the day when a buyer snapped up Jan 70 puts:

As shares slid back from the early $75 pop, this trader saw a gain of about $1 in less than an hour- a quick 20% return and clearing data suggests the trade is still open- with Jan 70 puts trading near $6.80 early Friday as shares slid below $70.

The chart of volume shows an interesting situation as shares have climbed- implied volatility has gone along for the ride- doubling along with share price in a month. This is unusual since it suggests growing concern of larger price swings despite what appears to be confidence in share price. 30 day at-the-money implied vol in November was about 43%- which by the rule of 16 tells us to expect a daily standard deviation of 2.7%. Current IV near 106% tells us to expect much greater moves, that 6.6% standard deviation says one or two days a week we are likely to see moves greater than 6.6% (about $4.50 based on current spot).

My gut feeling is that TWTR is more likely to see $40 before it will see $100, but one important axiom to keep in mind is that markets can stay irrational longer than you can stay liquid, which means I would not consider a naked short or call-write on TWTR at this time. Im more willing to place a no volatility bet in TWTR, especially since that 100+IV works out to hefty premiums for some limited risk.

In this case I like the January (regular Jan, expire 1/18/14) 80-90 call spread sale for 1.60 credit. Risk is the 8.40 maximum loss but I believe the short duration here makes that acceptable (for me, maybe not for everyone). If you are fortunate enough to be long TWTR from a lower price level, an over-write might also be a nice trade- the Jan 80s are 3.10bid- near 4.4% of spot and youd still keep the 14% upside if the shares were called away in 22days.

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