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Twitter Inc (NYSE:TWTR): How Should Investors Trade Ahead of Earnings?

The options market is pricing in an explosive move for Twitter Inc(NYSE:TWTR) following its first earnings report as a public company Wednesday night.

Twitter shares have soared more than 150% from their initial offering price in the social-media websites first three months as a public company. And Wednesday will be the first opportunity for investors to take a look at the company’s financials and prospects since its debut.

The average analysts’ estimate for quarterly revenue is $217.82 million, up 94% from a year ago. The company is expected to post another loss – about 2 cents a share – resulting from investments in research and development and an expanding sales force.

Should Investors Buy TWTR After Today’s Rally? Find Out Here

But the focus Wednesday won’t be financials, said JJ Kinahan, chief strategist at T.D. AmeritradeAMTD 0.00%. “Twitter is in its infancy,” said Mr. Kinahan. “What it really comes down to is forward-looking statements and what Twitter says about its future prospects.”

With little idea on what to expect, the options market is pricing in expectations for a 15% jolt higher or lower for shares through the end of the week following the report, based on the price of an options strategy known as a straddle.

The straddle is a neutral strategy that involves the purchase of both put options, which grant the right to sell shares at a set price by a set date, and call options, which grant the right to buy them. It can profit by moves in either direction. Pricing on weekly options expiring after the close Friday provides clues as to the kind of move the options market is expecting.

The price of a straddle midafternoon Wednesday in weekly $66.50 strike options when the stock was trading at $66.48 was $10.13 a share, according to FactSet data. That means the options market is pricing in a 15% jump or tumble to above $76.61—a record high—or below $56.35—a nearly two-month—through the end of the week.

“When the market doesn’t know what to expect, options prices get pumped higher,” Mr. Kinahan said. “The straddle is priced for a big move because no one expects them to make money yet, and it all comes down to how people interpret the forward-looking statements.”

Individual trades Wednesday painted a mixed picture, Mr. Kinahan said, with a blend of bearish hedging by existing stockholders and bullish speculation.

In one trade, an investor set up a strategy known as a “call spread,” in which a trader buys calls at one strike price and sells an equal number at a higher strike price. While selling calls at the high price caps profits, the premium collected from the sale helps offset the cost of buying the lower strike calls.

 



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  1. Mr4Guv February 5, 2014 Reply

    Q4 net loss of $511 million – yeeeeeeouch! Last i checked, that was over 1/2B$.
    Time for me to sell.

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