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Hawk’s Nest

Twitter M&A Strategy Scores 700% Gain

by | Nov 11, 2022

Twitter (TWTR) ended up getting the $54/share as the deal closed and played out exactly as our July write-up predicted. Twitter was below $40 on 7/27 when we wrote the following:

Twitter (TWTR) is seeing a lot of positioning the past few weeks as it becomes an event-driven play with shares trading at a 38% discount to the Elon Musk $54.20/share buyout price as he tries to walk away from the deal and sets up for a court battle in October. TWTR will also hold a shareholder meeting in September to vote on the deal. Recent TWTR flow includes an opening sale of 6000 October $32 puts, a buyer of 10,000 September $42 calls, the June 2023 $45/$50/$55 butterfly call spread opening 15,000X30,000, a buyer of 30,000 September $43 calls that sold August $42 calls, opening sale of 10,000 August $37 puts, a buyer of 3000 March $40 calls for $2.2M, January $47 calls bought 10,000X, buyer of 7000 October $42 calls, and December $45/$50 call ratio spreads opened 10,000X20,000. All indications from the flow are that the deal likely goes through but at a lower price around $50/share. TWTR now has a $30B market cap trading 47X Earnings and 5.4X EV/Sales with revenues seen rising just 6% in 2022 but accelerating to 15%+ annual growth 2023-2025. TWTR is coming off another weak quarter as social advertising slows but did not hold an earnings call due to the deal. TWTR saw expenses surge 31% Y/Y as it recorded a sharp operating loss. Analysts have an average target of $43 with short interest staying low at 4.6% of the float. Baird only sees a 20% chance of the deal closing at the original offer price and notes internal turmoil, employee turnover and a contracting ad market. Wedbush sees Twitter with the upper hand in the case with potential for the deal to go through or at least receive a $1B settlement. Rosenblatt raised shares to Buy recently with a $52 target seeing Twitter winning the case and a settlement likely within 3% of the original offer price. “

Further, our preferred strategy was buying the January $42/$47 call spreads and selling the $25 puts for a $0.60 debit, a spread that closed for $5, 700% gain.

We wrote: “TWTR November options are pricing in around a $12 range which fits the scenarios of outcomes. The flow suggests asymmetric skew for upside/downside here and there are many ways to structure trades around this event. I like selling the January $25 puts at $2.15 to buy the January $42/$47 call spreads at $2.75.”