Twitter Options Hit the Market Without a Hitch

Twitter

Source: http://www.flickr.com/photos/johanl/

Twitter (NYSE:TWTR) launched its initial public offering on November 7, and so far, trading has been pretty calm. The stock opened about 73 percent higher than its IPO price of $26 per share, hit a high of $50.09 on its first day of trading, and came to rest at $43.90 on its sixth day of trading.

As a recent addition to the public market, Twitter’s position is still being fleshed out. Earlier this week, the first shares available to borrow for short selling were made available at an annualized cost of about 20 percent. Costs have since declined to between 8 and 10 percent, and are likely to continue trending lower toward the sub-1 percent costs carried by companies like Facebook (NASDAQ:FB) and LinkedIn (NYSE:LNKD).

Options trading went live on Friday without much trouble. More than 50,000 contracts were traded within two hours of opening, an accelerated but far from record-breaking level. Facebook famously broke options trading records with 365,000 trades the day options for the social network went live. Popular trades included the December $30 strike put and the February 2014 $50 strike call. Strike prices were expected to fall within a range between $35 and $50.

There’s a lot to like about Twitter, but at its current valuation — approximately 22 times expected 2014 sales — investors are willing to pay more per dollar of Twitter sales than per dollar of Facebook or LinkedIn sales. This, many observers have noted, seems unreasonable. Facebook and LinkedIn are both sitting on demonstrably functional earnings-generating business machines, while Twitter is sitting on $300 million in losses over the past three years, with a $65 million loss in the most recent quarter alone.

Right now, Twitter’s valuation is largely a function of speculation, and this is likely to encourage traders to try and take advantage of expected price movements — up or down — in the future using options. There is not much data to work from, but Twitter’s implied volatility is about 50 percent right now, and people are looking for ways to hedge their bets.

Most analysts hold a 12-month price target for Twitter in a range between $30 and $40 per share, with profitability expected in 2015, suggesting some downside in the future. Twitter will grow into its current valuation when it manages to do what Facebook and LinkedIn did: win over Wall Street with demonstrable ongoing earnings.

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