Should You Buy the Dip in Twitter Stock?


Nov. 1 2019, Published 4:24 p.m. ET

In the November 1 trading session, Twitter stock (TWTR) is trading at $29.64, down 1.10% from the previous session at the moment of writing. Moreover, the company plunged 24% over the past two weeks.

This massive depreciation in the stock price was due to third-quarter earnings performance and lower guidance. The company released its earnings on October 23, before the market opened. It missed Wall Street’s earnings per share and revenue expectations by $0.03 and $51.21 million, respectively.

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Moreover, Twitter lowered its revenue guidance to $940 million–$1.01 billion, which also triggered the massive sell-off. However, options traders appear to be bullish on Twitter stock, suggesting the stock resurgence in the coming months. So, let’s consider TWTR’s options activity to see if you should buy Twitter stock right now or if the decline is just starting. 

Options traders’ huge bullish bets on Twitter stock despite the sell-off

The options for TWTR, which expire on November 8, saw increased open interest levels during today’s trading session. As per Barchart.com, the open interest for the $29.50 calls surged by 6,212 contracts to a total of about 6,514 open contracts. It’s a large wager for Twitter stock. A buyer of the calls would need TWTR to rise to $30.04 in the coming week, a gain of about 2% from the current price.

Plus, the open interest levels for the March 20 $30.00 calls have also seen increases in their open interest level on November 1. Their open contracts rose by 3,126 contracts to about 12,142 (according to Barchart.com). So it’s safe to say that this particular transaction looks like a big, bullish bet. The bet has a total dollar value of about $3.6 million, given that the stock would need to rise to $33.05 by the March expiration. That’s a gain of approximately 11.8% from TWTR’s price at the moment.

Finally, the open interest for the $32.00 calls that expire on January 17 rose by 2,057 contracts today. This rise came in at the total to 9,404 open contracts. A buyer of the calls would need Twitter stock rise to $33.01 by the expiration date to earn a profit.

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How much volatility are options traders expecting in the coming weeks?

The implied volatility levels for the options, at a $30.00 strike price that expires on November 15, stands at 31.35% for the stock. For instance, the SPDR S&P 500 Trust ETF’s (SPY) implied volatility level stands at 9.39% for the same expiration date. This number means traders expect the stock will be more volatile than the overall market. Let’s see TWTR’s option chain to estimate the expected price movement and option traders’ sentiment for Twitter stock. 

If we take a closer look at the November 15 options, we can see a bid/ask for the $30.00 call option of $0.56/$0.57. We can also see a bid/ask for the $30.00 put option of $0.89/$0.91. You should bear in mind, the options strike closest to the TWTR price of $29.64 at the moment of writing. You can calculate the expected price move using the mid-prices of these options:

0.90 (30.00 put) + 0.565 (30.00 call) = 1.465/29.64 = 4.9%

As you can see, the options imply that TWTR could rise or fall by ~5% by the November expirations from the $30.00 strike price. To assess the expected price movement, I’m using what’s called the “long straddle strategy.” This approach lands the stock in a trading range of $28.2–$31.12 by November expiration.

Pay attention to the number of open call and put contracts, too. In Twitter’s case right now, the number of open calls at the $30.00 strike price outweigh the open puts by around 69%. There are 6,971 calls to 4,121 open puts. And this difference suggests that options traders are more bullish than bearish for Twitter stock. 

If you’re interested in more technical analysis stories like this, check out Why Apple Stock Could Continue to Rise Post Q4 and Bristol-Myers Squibb Earnings: Time to Buy BMY Stock?


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