Trade the Twitter Takeover Bid With These 2 Options Spreads

  • Earnings are largely unimportant for Twitter (NYSE:TWTR) after its $54.20-per-share buyout.
  • For TWTR stock, everything ultimately comes down to the final deal approval.
  • Use an options strategy to position for a pop or a flop in Twitter’s shares.
Smartphone with Twitter (TWTR) application open on screen

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Twitter reported first-quarter earnings this morning. Revenue was a tad light at $1.2 billion versus expectations of $1.23 billion. Monetizable Daily Active Users (mDAUs) were slightly better than expected at 229 million. TWTR stock has reacted with a yawn so far. Shares have barely budged, as one would expect. Look for more sideways action until the deal deadline approaches.

TWTR Twitter $48.76

The Latest for TWTR Stock

Twitter is still well below the $54.20 takeover price due to fears that Elon Musk may still pay the $1 billion fee to terminate the deal. There is still more than 10% upside left between the current price of TWTR and the buyout price of $54.20. The deal is due to close sometime in early October.

This leaves ample upside opportunity for those who think the acquisition will close. If the deal falls apart, all bets are off. Let’s take a walk through both of those potential scenarios.

TWTR stock has two levels to watch in the coming months, as highlighted in the chart below. The upside will be likely be capped at $54.20 unless there is a better bid by another suitor for the company. However, this is a long shot at best.

Source: The thinkorswim® platform from TD Ameritrade

The downside — and probable worst-case scenario — is the $33 level TWTR stock hit before rallying. Let’s use these two levels to construct a bullish and bearish options trade to position for the deal to either finalize or fall apart.

What to Expect if the Deal Goes Through

If the deal continues as planned, shareholders will receive the $54.20 buyout price in cash. Certainly, one can buy the shares and realize the roughly 10% gain. This approach, though, can be both costly and risky.

Buying 100 shares would tie up almost $5,000 and have significant downside if the deal falls apart. Using an options strategy in place of stock alleviates both of these concerns.

Going long with a defined-risk bullish call debit spread requires less money with less risk and a better return. It’s a win-win-win situation.

Currently, the January $50/$52.50 call spread can be bought for around $2. Each spread, which controls 100 shares of stock, would cost $200. If the deal goes through, the spread will be worth $2.50 at expiration.

This would result in a net gain of $50 per spread for a net return of 25% ($50 gain versus $200 cost.) So far, this offers less money up front with far less downside risk and a greater potential return compared to the stock buying strategy.

What Happens to TWTR Stock With No Deal

If the deal falls apart, TWTR stock will definitely feel the heat. It will most likely lose all of its takeover premium, and then some. Shorting the stock to bet on a bust is both risky and expensive. Doing so with 100 shares ties up nearly $2,500 in margin and would likely lead to a 10% loss if the deal goes through.

Going long with a defined-risk bearish put spread is basically the same sort of trade as the bull call spread just discussed. The only exceptions are using puts in place of calls and paying a smaller debit due to the lower likelihood of the deal falling apart.

Currently, the January $40/$35 put spread can be purchased for about $1.20 per spread. Each one, controlling the ability to short 100 shares of stock, would cost $120. If TWTR stock falls below the $35 level at expiration, then the spread would be worth $5.

The result would be a gain of $3.80 per spread for a net gain of just over 300% ($380 gain versus $120 risk.) Once again, it’s a far less risky way to position for the deal to fall apart versus shorting the stock.

Whether or not the Twitter takeover is ultimately a go or no-go is anyone’s guess. Using options strategies in place of stock takes the guesswork out of the risk-reward tradeoff.

On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


Article printed from InvestorPlace Media, https://investorplace.com/2022/04/trade-the-twitter-takeover-bid-with-these-two-options-spreads/.

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