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Active but orderly debut for Twitter options

An illustration picture shows the Twitter logo reflected in the eye of a woman in Berlin, November 7, 2013. REUTERS/Fabrizio Bensch
An illustration picture shows the Twitter logo reflected in the eye of a woman in Berlin, November 7, 2013. REUTERS/Fabrizio Bensch

By Doris Frankel

CHICAGO (Reuters) - Trading in options of Twitter Inc was dominated by put volume with a mixture of selling, hedging and speculative activity in an overall orderly debut on the U.S. options market, a week after the social media company's stock started trading.

A total of 82,000 puts and 41,000 calls changed hands in Twitter on Friday for a put-to-call ratio of 2:02:1, according to options analytics firm Trade Alert. Option volume was on the low end of expectations, while the underlying shares had a relatively light day of 8 million shares traded

The options market has been "rather well-behaved" from a price, volume and implied volatility perspective, said Tim Biggam, chief market strategist at options firm TradingBlock in Chicago.

Twitter's turnover did not match the frenzied pace of Facebook Inc, which set a record with its first-day options launch in May 2012, when more than 365,000 contracts changed hands, Trade Alert figures showed.

One factor that may have worked against Twitter option volume is that its first day of trading fell on the monthly expiration of November options, said J.J. Kinahan, chief strategist TD Ameritrade.

"Typically during expiration, options traders are focused on expiring open positions in puts and calls in single stocks and mitigating their risk there," Kinahan said. "So starting next week, Twitter options may get more attention with expiration out of the way."

Furthermore, Kinahan said, many non-professionals are reluctant to trade as volatility levels and pricing can be volatile at first, although that was not necessarily true for Twitter options.

Option order flow consisted of two-sided trading in the at-the-money Twitter options, Kinahan said. The most active option was the December $30 put, with volume of 30,746 contracts.

There was a large seller of the December $30 strike puts at five cents apiece. The put play could have been done for a variety of reasons, among them the desire to have the stock at the $30 level by December expiration, Kinahan said.

In terms of risk for the shares, the 30-day implied volatility for Twitter options stood at about 52 percent, according to TradeKing data.

Implied volatility, a key component of an options price, is a barometer of perceived risk for future stock movement.

"Looking at options prices for Twitter today, it turns out that the shares were surprisingly available for short sellers. So the put prices were not artificially inflated compared to the calls," said Brian Overby, options analyst at online brokerage firm TradeKing based in Fort Lauderdale, Florida.

The cost to borrow Twitter shares for short bets was between 8 and 10 percent annualized, according to Markit. That was down from the 20 percent level when shorting started earlier this week, but still more than Facebook and LinkedIn, which carry costs of less than 1 percent.

Investors typically use options to hedge existing stock positions or speculate on future movement in a stock. Call options give buyers the right to buy a stock at a certain price by a specific expiration date. Puts convey the right to sell shares by a certain date at a specific price.

Twitter shares fell 1.6 percent to $43.98 on Friday. They were priced on November 6 at $26 a share. On November 7, the stock opened at $45.10 a share on the New York Stock Exchange and rose to $50 a share before pulling back.

(Reporting by Doris Frankel; Editing by David Gaffen, Nick Zieminski and Dan Grebler)

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