The selloff that wiped $17 billion from Twitter Inc.’s market value this year is giving way to a frenzy of demand for options that pay should the shares rebound.
After the stock erased more than 85 percent of last year’s rally in the first five months of 2014, trading in bullish contracts has surged to the highest level relative to bearish ones since February, data compiled by Bloomberg show. Puts protecting against a 10 percent decrease in Twitter shares cost 0.66 point more than calls betting on a similar gain. Normally, calls are cheaper by 2.56 points, according to the data.
Twitter shares have been hammered in 2014 by both a selloff in last year’s biggest technology winners and equity sales by company insiders who had been restricted since the initial public offering. Now, with the Nasdaq 100 Index last week erasing its decline from March and April, speculators are betting that a recovery in Twitter won’t be far behind.
“There’s a feeling from most people that it overshot to the downside, and that’s likely where the bid in the options market is coming from,” Rob Sanderson, an analyst at Stamford, Connecticut-based MKM Partners LLC who has maintained a buy rating, said in a May 29 phone interview. “These post-IPO, high-growth emerging names are wickedly volatile.”
Twitter, which saw its share price climb 145 percent last year, has plunged 49 percent since the start of the year. The stock lost 18 percent on May 6, the day lockups expired from the November IPO, and slid for nine straight days in the middle of the month. Last week it rebounded, climbing 6.4 percent.
The biggest advance came on May 28, when Nomura Securities upgraded the San Francisco-based microblogging site. Investors have been too focused on at slowdown in user growth, which Twitter can change with product tweaks and international expansion, according to Anthony DiClemente, the analyst. The stock increased 11 percent that day.
“There’s a very good chance that user growth reaccelerates from here, given product enhancements, given international growth,” DiClemente said in an interview with Bloomberg News that day. “When you think about Twitter that way, with over a quarter of a billion users, it’s hard to imagine a valuation that is a lot lower than where it is.”
Compared with other technology shares, Twitter’s recovery has been slow, with the shares down 56 percent from their high in December and only 6.4 percent above last month’s low of $30.50. By contrast, Tesla Motors Inc. rallied 16 percent in less than a month and ended May 18 percent below its 2014 high, while Facebook Inc. gained 12 percent since April 28.
The Nasdaq 100 index capped a rebound last week and rose to a 13-year high after falling more than 7 percent from March 5 to April 11. The PowerShares QQQ Trust, the biggest exchange-traded fund tracking technology shares, attracted more than $1 billion in the week ending May 30, the largest deposit since February, data compiled by Bloomberg show. About $2.9 billion was pulled out in April, the most since 2000.
Short interest in Twitter currently sits at 2.7 percent of shares outstanding, down from a high of 7 percent reached on May 7. The measure touched a 2014 low of 2 percent on May 28. The number of Twitter call options traded on May 28 exceeded put volume on the stock by 111,277, the most since Feb. 5.
“You’ve got people buying calls waiting for the bounce and people selling puts, trying to get into the stock,” Mark Sebastian, director of trading and investments at Swan Wealth Advisors Inc., said by phone from Chicago. “Once that stock has taken that massive dive, you kind of expect that because traders don’t think it can go down any more.”
Jim Prosser, a spokesman for Twitter, didn’t respond to a phone call or e-mail requesting comment on the company’s options trading.
Future profitability remains a concern for investors such as Robert Pavlik of Banyan Partners LLC. With a valuation derived from user milestones rather than earnings, Twitter will struggle to attract investor interest once its novelty wears off, he said.
The company is forecast to post losses through 2017 using generally accepted accounting principles. Based on an average analyst forecast for adjusted earnings of about 4 cents in 2014, the company trades at a price-earnings ratio of more than 800, compared with less than 20 for the Nasdaq 100, according to data compiled by Bloomberg.
“Current valuations are still ridiculous,” Pavlik, the New York-based chief market strategist at Banyan Partners, which manages $4.5 billion, said in a May 30 phone interview. “Twitter doesn’t look all that cheap. The options activity is just people bottom-fishing for an underperforming stock.”
Twitter’s stock retreated for four straight days starting May 2 as about 480 million shares from company insiders became eligible for sale five months after the IPO. T. Rowe Price Group Inc. dumped a quarter of its Twitter stake in the first quarter, ending March with 13.56 million shares, according to a May 15 regulatory filing.
Swings in the company’s shares have been slowed in the last few weeks along with the rest of the market. The Chicago Board Options Exchange Volatility Index, a gauge of options prices known as the VIX, closed for a fifth straight day below 12 last week, the longest stretch since February 2007, data compiled by Bloomberg show. The gauge jumped 1.6 percent to 11.58 at the close in New York. Europe’s VStoxx Index gained 3 percent to 16.26.
“Twitter got pounded, crushed,” Stephen Solaka, who helps oversee about $145 million as managing partner of Belmont Capital Group in Los Angeles, said by phone. “On the way down there was more of a demand for protection. Now, it looks like the fear has dissipated.”