Thursday, February 6, 2014

Twitter (TWTR) - Post Earnings Analysis: How the Option Market Under-priced Risk... Again

TWTR  is trading $51.33, down 22.2% with IV30™ down 29.0%. The Symbol Summary is included below.

Provided by Livevol

This is a follow-up / post-mortem of TWTR earnings and the preview posts preceding it. You can read the two articles I wrote just ahead of earnings, below:

2-4-2014: Twitter (TWTR) - Earnings Preview: Why is The Option Market Reflecting Lower Risk? Did You Know This... Again?...

2-2-2014: Twitter (TWTR) - Earnings Preview: Two Things I Didn't Know. Do You?

The main point in the prior posts was simple:
"I've been banging the drum about how low the volatility has been in the option market and have written in great detail surrounding TWTR, AAPL, NFLX, FURX, NAV and others. At some point, the option market will prove right, and I in fact will prove dead wrong. It's gonna happen...

But, right now, it's difficult for me to understand how the IV30™ hasn't moved (or even how it's gone down) into earnings.

Maybe all the news is out?
Maybe there are no more surprises?
Maybe this is absolutely correct

... but maybe it isn't.

Disclosure: I hold a position in TWTR."

The bottom line is that the IV30™ didn't rise into earnings, it stayed curiously flat-lined and that was very, very ... very weird. Here's that volatility chart from Tuesday:

Provided by Livevol

It's that flat-line that had me thinking "mispricing" in the option market.  And yeah, it was mis-priced.

Here's how TWTR looked on Tuesday (the date of the final pre-earnings post):

Provided by Livevol

And the option market:

The $65 strike straddle in the Feb 7 weeklies: $9.80.
The $65 strike straddle in the Feb 21 monthly: $11.20.

And finally, today:

Provided by Livevol

The $65 strike straddle in the Feb 7 weeklies: $9.80 ---> $13.70 (parity) (40% change)
The $65 strike straddle in the Feb 21 monthly: $11.20 ---> $14.10 (26% change)

I actually think TWTR stock is getting held up right now b/c of the market uptrend.  Given the user growth news, I would have expected TWTR to be down in the $45 range today.  If it can't grow users, the growth story means nothing, regardless of greater revenue per advertisement.

This is trade analysis, not a recommendation.

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