How Large Option Traders Are Playing Twitter Following 20% Sell-Off

Twitter Inc TWTR investors suffered one of their worst days in recent history Friday when the stock crashed more than 20% on disappointing third-quarter user growth numbers.

A flurry of large Twitter option trades were mixed in nature on Friday as investors struggle to determine if the Twitter sell-off is just getting started — or if it’s a long-term buying opportunity.

Related Link: How Large Option Traders Are Playing AMD Following Xilinx Buyout, Q3 Earnings

The Twitter Trades: On Friday morning, Benzinga Pro subscribers received 38 option alerts related to unusually large trades of Twitter options. Here are a handful of the biggest: https://pro.benzinga.com/

• At 9:32 a.m., a trader sold 862 Twitter put options with a $46 strike price expiring on Friday near the bid price at $2.75. The trade represented a $237,050 bullish bet.
• At 9:41 a.m, a trader sold 218 Twitter put options with a $50 strike price expiring on Nov. 6 near the bid price at $6.10. The trade represented a $132,980 bullish bet.
• At 10:18 a.m., a trader bought 500 Twitter call options with a $40 strike price expiring on Jan. 15 at the ask price of $5.831. The trade represented a $291,500 bullish bet.
• At 10:46 a.m, a trader sold 465 Twitter put options with a $35 strike price expiring on June 18 near the bid price at $4.001. The trade represented a $186,046 bullish bet.

Of the 38 total large Twitter option trades on Friday morning, 16 were calls purchased at or near the ask or puts sold at or near the bid, trades typically seen as bullish.

Another 22 trades represented calls sold at or near the bid or puts purchased at or near the ask, trades typically seen as bearish.

Two trades were executed near the midpoint of the bid-ask spread, a price typically considered neutral.

Why It's Important: Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively small size of the largest Twitter trades by institutional standards, they were likely not institutional hedges.

Disappointing Growth: By most measures, Twitter had a decent third quarter from a financial standpoint, beating analyst expectations for earnings and revenue. Yet the negative market reaction on Friday suggests the Twitter bull story is still all about user growth.

Twitter reported third-quarter adjusted EPS of 19 cents on $936 million in revenue. Analysts had been expecting 6 cents and $777 million, respectively. Revenue was up 14% from a year ago, and ad revenue was up 15% to $808 million.

Twitter also reported 27% growth in user engagement, but 187 million monetizable daily active users (mDAUs) came up well short of analyst estimates of 195 million. Still, mDAUs were up 29% year-over-year. 

Much of the negative price action on Friday may have been due mostly to extremely high expectations for Twitter following a blowout earnings report from social media competitor Snap Inc SNAP. Prior to Friday’s sell-off, Twitter shares were up more than 60% year-to-date.

Looking ahead, Twitter warned that advertiser behavior in the fourth quarter could be “hard to predict” due to uncertainty associated with the presidential election.

Benzinga’s Take: For most companies, an earnings and revenue beat and 29% user growth would be a great quarter.

With Twitter’s stock up so much in 2020 heading into the earnings report and such a big quarter from Snap earlier this month, investors may be concerned that Snapchat and other social media platforms are gaining precious market share from Twitter.