The Exchange

Twitter Options Begin Trading Today: Here's What You Need to Know

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Dan Nathan is the Co-Founder and Editor of RiskReversal.com a website dedicated to helping equity traders understand alternative ways to express their views in the equity markets. Dan has spent 16 years as a proprietary equity & options trader at hedge funds and within the equity derivatives group at Merrill Lynch.

We’ve received a number of questions about Twitter (TWTR) options over the last week.  Options on TWTR will start trading today on weekly and monthly maturities.  A few highlights from Greg Bender of Bloomberg in a note yesterday:

-- Last second regulatory for weekly options. So first expiration will be November 22nd. Not sure on LEAPs.

-- Highlights from the CBOE’s contract specs:

Contract Specifications:

Initial strike prices: Will range from 35 to 50, in one-point increments

Position limit: 25,000 contracts

Expiration cycle: March, with introductory expirations in December, January, March and June

CBOE and C2 To List Options on Twitter (via CBOE)

-- Twitter’s first public earnings are scheduled for January 15th according to ERN <GO>, right before January expiration. I have not been able to confirm that however.

Of course, the million dollar question is where Twitter options are going to be priced.  Things the market makers will consider:

1. Most importantly, what has been the recent realized volatility on Twitter stock?  Though we only have 5 days of data (the first day was the starting point), the realized volatility so far is around 50.  Since the tail risk always resides in selling options rather than buying them, market makers will almost surely price options at a premium to recent realized volatility.  So above 50.

2.  Other large social media IPO’s over the past 2 years have generally seen elevated implied volatility at first, which then moved lower as the stock accumulated more trading history.

Once more, courtesy of Bloomberg:

Facebook’s implied volatility was 61.5 on average for thefirst two weeks of trading, according to data on one-monthcontracts with an exercise price closest to the stock compiledby Bloomberg. The measure has since fallen to 40.5.For LinkedIn, the professional-networking site which wentpublic in May 2011, implied volatility has fallen to 36.8. Thatcompares with 74 during the initial two weeks.

3.  Volatility on social media stocks like LNKD, YELP, or GRPN has picked up in the past month, which might move implied volatility for TWTR a bit higher as well.

Put it all together, and I’m relatively confident that we’ll see Twitter options priced in the 55-65 implied volatility range to start.  Higher than Twitter’s 5 day realized volatility so far, but not higher than the current implied volatility for most stocks in the sector.

As of yesterday’s close, TWTR is trading right in the middle of its trading history (high around 50, low around 40):

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Twitter intraday price action, courtesy of Bloomberg

Those are the technical levels (40 on the low end, 50 on the high end) traders will be watching as the options list today.  While I expect implied volatility to be in the 55-65 range, the real question is what the stock does in the coming weeks.  On that front, your guess is as good as mine.

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