Twitter (TWTR) is so far into overbought territory it could go higher on a short squeeze alone. The short sellers have jumped onto this bandwagon to the extent they might be ticketed for overloading it.
Forbes reported that Twitter has traded every share issued in its IPO. The IPO investors were definitely not there for the long haul.
While short interest was only 23.7 million shares which may seem small in relation to the 544 million shares outstanding, the IPO only offered 70 million shares so the short position is massive compared to available shares.
The first tranche of additional shares eligible to be sold and not part of the issue will be available to trade on February 15, 2013. That could increase the supply and drive the price down.
Option premiums on Twitter reflect the volatility of the stock. At the money February $70 calls command a premium of about $9.00 and at the money puts at the same strike trade for $10.50 or so. A straddle would yield $19.00 a share after commissions. If the stock runs higher, the seller will be called out and have to be satisfied with a gain of $19 and change. That is about as those who flipped the IPO in its first day of trading. If the stock tanks the seller of the straddle would be long Twitter at about $51.00 after commissions. That is the risk side.
It is not often you either buy a stock for a 27% discount to market or be solaced with a $19 point gain for missing it.
As you know, I think Twitter is a good short from any fundamental perspective but a dangerous one from a trading point of view. Any company not valued on fundamentals can trade at any price on a given day. As a result, I don't have the courage to join the shorts outright. But I am totally at ease with a short option straddle for $19 in premiums at the market. If I end up long, I will simply write calls in the money to have the stock called away or collect another premium.
The market's enthusiasm for Twitter is not likely to turn to despair in 6 weeks. It could of course, but that is a risk I am willing to take.
At the time of writing I have no position but by the time this article gets published, expect to find me short both puts and calls at market on this one.
The short calls reflect my short position leaning. The short puts are a hedge. It should be a fun ride.