Twitter Options Prognosis: #Boring

By Bryan Wiener The most highly anticipated introduction of options trading since that of Facebook

has come and gone, including the excitement. Twitter

options are up and running across all exchanges, but dreams of heavy volume and of vol (volatility in option prices) are just that: #dreams. Initially, options were set to trade in dollar strike increments with monthly expirations. Apparently things changed at the eleventh hour, as options on the social networking site are trading in half-dollar increments with weekly expirations. Volume is extremely light, given the low spot price and overwhelming popularity of the stock. Even after Carl Ichan nearly sent the entire US market into a borderline flash crash on Monday afternoon with his market-correction comments, the TWTR at-the-money (ATM) 41 calls expiring this Friday traded a whopping 294 contracts the entire day. There should be an extra 1 or 2 zeros tacked onto that volume number given the hype surrounding the IPO. The lack in volume is most likely due to the relatively low float (shares available to the public) and the high borrow rate charged by brokerages to short shares, which are obviously not easy to locate. When option traders either buy calls or sell puts to take advantage of the assumed mispricing in implied option volatility, they must hedge their position by selling the underlying stock (deep in-the-money options will suffice as well, but the spread is quite wide). Aside from their lack of excitement, TWTR options tick in nickel increments and are only 1 to two ticks wide with significant depth of liquidity. They are priced within the range of expectations, with an annualized volatility just north of 64%, which implies a 4% daily volatility in the underlying. Hopefully, when TWTR releases more shares to the public, volume will rise. As of now, not too many traders have a need to hedge their positions, nor do option traders want to cross a 10 cent-wide spread to put on a volatility position in a name that has less than 2 weeks of trading data. #releasemoreshares.