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Likely Path of Twitter

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One way to think about the likely path of Twitter (TWTR) over the next several quarters is to focus on the makeup of its future shareholders. As Twitter becomes less like Groupon (GPRN) and more like American Electric Power (AEP) in the minds of investors, it should become less volatile.

Investors that bought the stock at the IPO or thereafter were willing to do so with one eye closed, figuring that a squinty guess at future revenues would suffice for a company with such massive perceived potential. In the months ahead, marginal buyers of TWTR shares will have more information, will be more aware of the risks to the company's growth, and will, I expect, be less willing to dump their positions. In other words, even if company fundamentals don't improve substantially, the changing makeup of its owners should bring down price volatility.

There is a positive relationship between the volatility of a stock and the absurdity of assigning any price target to that stock. That's almost a tautology, really: when company fundamentals are themselves scarce, or volatile, it's harder to forecast future prices or to expect shareholders not to trade more actively. But as data roll in and expectations firm up, investors have fewer surprises, fewer reasons to change their positions.

Since its IPO, the realized volatility over any given month in TWTR has been as high as 113% and as low as 22%. Including Wednesday morning's gap lower, the current one month volatility is about 66%.

Compare the best estimates of options markets, which are already pricing in a turn to somewhat quieter trading: at three-, six-, and twelve-month maturities, option implied volatility is 53%, 56%, and 53%, respectively. The standout point to me is that the one year estimate, interpolated from January 2015 and January 2016 options, is marking its lowest level ever this morning, even as the stock gaps down after disappointing earnings.

This is a trend to be expected for the reason noted above, and it has some direct implications for traders. The shares may be volatile in the very short term, and near-dated options will reflect those swings. But as TWTR is perceived less like a fetishized social media growth story and more like the public utility for the 21st century that it has become for so many users, expectations around future earnings will change as well.

I don't know if shares priced at $38 represent a great buying opportunity, but long-dated puts priced at 53% annualized implied vol look like insurance worth selling.

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