New Options Backtester
Search, filter, and sort 65,769,505 backtests

Market Events

Thursday, July 14th 2022

What Options Market Tells Us About Twitter

Amid a legal battle between Elon Musk and Twitter, traders can assess trends in options market for clues on where stock might go


Traders can use trends in the options market to assess where Twitter's stock might go amid the legal battle between Elon Musk and the social media platform. ORATS found interesting stock and volume trends ahead of key news events earlier this year, and traders expect significant volatility ahead of an important earnings report on Friday morning. The options market initially believed the deal would go through, but now suggests a low probability of a takeover.

  • Mike Zaccardi author
  • Amid a legal battle between Elon Musk and Twitter, traders can assess trends in options market for clues on where stock might go
  • ORATS found interesting stock and volume trends ahead of key news events earlier this year
  • An important earnings report Friday morning, and traders expect significant volatility

The Elon Musk vs Twitter saga continues. It’s been more than three months since the world’s richest man disclosed a 9% stake in the popular, though struggling, social media platform. Twitter (NYSE:TWTR) shares rose sharply on April 4—gapping up from near $39 to almost $50. The stock hit a peak of $54.57 the next day, above the dubious $54.20 offer price that would come on April 14. The Twitter board accepted Musk’s offer on April 25. Since then, however, it has been an ugly feud, all the while a massive sell-off in tech shares persisted. There’s no doubt that the market value of Twitter is far less today than when Musk polled his followers as to whether the platform supports free speech on March 25.

At ORATS, we noticed a large amount of call volume on Twitter shares as some investors were betting the stock would rally. While spotting interesting trading trends in puts and calls is important, so too is simply looking at implied volatility (IV). The higher the IV, the more premium in options. We observe implied volatility 30 days to expiration.

TWTR $44 Strike Call Options Expiring In May Saw Big Activity March 25


Twitter Overview


Source: ORATS

A well-timed options trade took place on March 25, where the $44 strike calls expiring in May were likely purchased at around $1 with the stock trading near $38. A little more than a week later, the stock breached $50, resulting in a more than 600% return.

If the options market expects a takeover to go through with no issues, then it is common to see premiums and IV collapse. After all, if an all-cash deal is a virtual lock, then the stock will simply approach the offer price and hover there until the corporate transaction occurs. Mechanically, once the deal is finalized, call options with strikes above the takeover price and put options with strikes below the takeover price become worthless. It’s important to know that premium is the portion of an option's price that is above intrinsic value. Intrinsic value for a call is simply the price of the stock minus the strike.

Getting back to TWTR – the options market generally believed the deal would go through back in late April. We noticed that IV levels on TWTR shares fell big from 78.5% to 25.2% on April 25. In May, though, the tide began to change. From May 9-13, the options traders thought less and less of the notion that a deal would happen at $54.20. It was then when implied volatility rose from 25% to near 80%. For perspective, the 200-day moving average of IV was just 50%.

TWTR’s IV Priced-In A High Probability Of Deal Initially


Twitter Indicators


Source: ORATS

Jump ahead to today, and TWTR’s IV is 59%, suggesting there is a low probability of a takeover. Bear in mind that its Q2 earnings report is confirmed to be released on Friday, July 22 BMO, according to a company press release on the evening of July 13. The at-the-money straddle implies about a 10% move up or down in TWTR shares by expiration on the 22nd.

The Bottom Line

Expect more swings in TWTR over the coming days as more Musk-related rumblings continue. The deal could be squashed, but it appears the courts will have the ultimate say. Traders can avoid the noise and look to the options world to get an idea of where Twitter shares might be headed. It was initially thought that an acquisition would go through, but that is no longer the case today. Looking ahead, a key company earnings report should bring about more volatility.

Disclosure: Mike Zaccardi has no position in any of the securities mentioned in this article.

Contact Us
Curious about enterprise pricing? Want to become an affiliate? Questions about our data? Let us know.
Your email
Your message
Institutional Quality Tools for All Options Traders
(312) 986 - 1060
36 Maplewood Ave, Portsmouth, NH 03801
Trading Tools
Historical Data
More Information