Twitter Traders Get New Tool as U.S. Contracts Start: OptionsNikolaj Gammeltoft and Lu Wang
Short sellers are making their presence felt in Twitter Inc. and now speculators with a bearish view will have options to trade, starting today.
Puts to sell Twitter shares will be available on U.S. options exchanges along with calls to buy in weekly and monthly maturities. About 5 percent of the newly public shares have already been lent out, the first step in a short sale, according to data compiled by London-based Markit. That compares with an average of 2.4 percent for the Standard & Poor’s 500 Index. More than 122,00 contracts changed hands today as bearish options outnumbered bullish ones 2-to-1.
Shares of Twitter, the unprofitable microblogging service, have soared 72 percent since being priced at $26 on Nov. 6 amid speculation profits will surge as the company expands in markets like mobile advertising. The options give traders a way to hedge against future declines or bet on gains in the stock price.
“A new issue will be more volatile than some established companies, especially in this area,” Alan Salzbank, who helps oversee about $620 million in options and stocks as a managing partner at Gargoyle Asset Management LLC in Englewood, New Jersey, said in a phone interview yesterday. “I’m sure there is going to be a lot of demand” for Twitter options, he said.
Twitter options will have a strike price between $35 and $50, according to a statement from CBOE Holdings Inc. The position limit is 25,000 contracts, said the operator of the Chicago Board Options Exchange, the largest venue among the nation’s 12 equity-derivatives markets.
Equity derivatives on social media and Internet companies are among the most popular with investors looking to speculate on their growth potential. Facebook Inc. options had an open interest of 4.9 million as of Nov. 13, the second-highest among U.S.-traded companies after Bank of America Corp., according to data compiled by Bloomberg.
Twitter, based in San Francisco, draws more than 70 percent of revenue from mobile advertising, compared with about half for Facebook. The company, which lost $64.6 million in the third quarter, won’t make a profit until at least 2015, according to the average of analysts’ estimates compiled by Bloomberg. LinkedIn Corp. and Facebook were both profitable at the time of their IPOs.
Investors are piling money into Internet and social media shares. Almost $727 million has flowed into the First Trust Dow Jones Internet Index Fund, the most for any year since it was created in 2006. About $77 million has been added to the Global X Social Media Index ETF, which tracks companies including Google Inc. and Zynga Inc., in the past two months, the most since the fund was created in 2011.
The confidence is echoed in the options trading, helping reduce the cost of protecting against losses in technology shares. Puts with an exercise price 10 percent below the PowerShares QQQ Trust cost 5.6 points more than calls betting on a 10 percent gain, according to three-month data compiled by Bloomberg. The price relationship known as skew for the exchange-traded fund tracking the Nasdaq 100 Index reached 5.29 on Oct. 21, the lowest level since May 2010.
While Twitter has more of its shares sold short than the average company, the figure may be high because of market makers borrowing shares after the IPO, according to Alex Brog, a director at Markit, a provider of financial information services. Those bets wouldn’t be considered bearish wagers by investors.
“As we saw with Facebook and LinkedIn, some Internet stocks have seen heavy demand to borrow by short sellers immediately after float,” Brog said via e-mail yesterday. “Having said that, both of them now see very low short interest and borrow costs.”
Gabriel Stricker, a spokesman for Twitter, did not respond to an e-mailed request for comment.
The cost to borrow Twitter stock is as much as 15 percent of the share price on an annualized basis, Markit data show. That compares with 0.3 percent for Facebook and 0.9 percent for LinkedIn. Short sellers borrow shares and sell them, hoping to profit from a decline in the stock’s price.
In Europe, nine of the 10 most-actively traded structured products tied to Twitter since its IPO were so-called put warrants, whose buyers profit if the shares drop below a pre-defined level, data compiled by Bloomberg show. Bank Vontobel Europe AG issued the put warrant with the greatest volume since the IPO, a security that will reward investors if Twitter’s shares are below $28 in June.
Twitter’s implied volatility, a key gauge of the cost of options, may be high because there’s limited data on the stock needed to determine how to price the securities, according to Brian Overby of TradeKing LLC in Charlotte, North Carolina. He said that the bid-ask spread, or the difference in prices for traders to buy and sell contracts, will also initially be wide for the new contracts.
“The market hasn’t had a lot of time as far as price discovery on the stock,” Overby, an options analyst for the brokerage firm, said in a phone interview on Nov. 13. “The market makers are trying to find that happy level for where the implied volatility should be, which is difficult because the stock hasn’t traded a lot and the options obviously haven’t traded.”
Facebook’s implied volatility was 61.5 on average for the first two weeks of trading, according to data on one-month contracts with an exercise price closest to the stock compiled by Bloomberg. The measure has since fallen to 40.5.
For LinkedIn, the professional-networking site which went public in May 2011, implied volatility has fallen to 36.8. That compares with 74 during the initial two weeks.
The CBOE Volatility Index lost 1.5 percent today to 12.19, a three-month low. The VIX measures investor expectations for market swings over the next 30 days using a formula that incorporates the implied volatility for the S&P 500.
Volume in Twitter puts to sell the stock was almost 82,000, while about 41,000 calls to buy traded. The most-active contract was December $30 puts followed by December $50 calls. The stock slipped 1.6 percent to $43.98. Implied volatility on one-month options closest to the shares was 52.5 on the first day.
More than 365,000 Facebook contracts changed hands on the first day of options trading in May 2012, the most among the biggest initial public offerings in the last decade, as the social-networking site produced the worst five-day return among the largest U.S. deals in 10 years.
“This depth of options trading in the social media and Internet names suggests that Twitter will also be an active name,” Jim Strugger, managing director and derivatives strategist at MKM Partners in Stamford, Connecticut, said in an interview. “Perhaps with Facebook’s post-IPO swoon in mind, large Twitter holders may take advantage of the options listing to hedge their underlying positions. Based on trading volumes in the TWTR peer group, speculators will likely be close behind.”