Twitter Upcoming Earnings: Volatility and Options

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Upcoming Earnings Expectations

Twitter (NASDAQ: TWTR) is scheduled to report fourth quarter financial results on Thursday February 9, 2017, before market open. Twitter will also host a conference call that morning at 8 a.m. eastern. According to the at-the-money option straddle in 10-Feb-17 expiration, traders are expecting a post-earnings price move of plus or minus 8.5%. The previous earnings release, Twitter gained +0.6% on the day to close at $17.66 vs an expected move of 11.5%. Since the end of the last earnings on 27-Oct-2016, TWTR has drifted higher by+6.3%, with the last price of 18.50. Its range over that time frame has been from 16.16 to 19.84. 

Investor Sentiment: Option Markets

Heading into the earnings release, option volume has been biased toward bullish call buying vs bearish puts when measured by taking (non-complex) option orders that were executed on the call offer and put offer. The five day average leading up to earnings, call purchases exceeded put purchases by a 3 to 1 margin in terms of both volume and notional value traded.

Historical Earnings Statistics

The average (absolute) earnings move in the last six quarters is 8.65% compared to average  expected moves of 13.5% Twitter stock declined 5 out of six earnings announcement. The opening gaps tend to be volatile accounting for a large part of the earnings volatility move.

Option Strategies

Let's take a look at a popular volatility strategy the Iron Butterfly. The strategy is a combination of the at-money straddle and the out-of-the-money strangle (one is bought and the other is sold). The following is a snapshot example in Twitter 10-Feb-17 expiration.

If the above Iron Butterfly is purchased for $1.10 the maximum profit is .40 cents (36% return). The stock has to close above $20 or below $17 at expiration for the maximum profit to be realized. If the stock closes at $18.50 the entire premium of $1.10 will be lost and go the seller. The break-even points are $19.60 and $17.40. The stock would need to move +/- 8.1% away from $18.5 for the Iron Butterfly to be profitable from the long volatility side. The last six earnings releases the average (absolute) move has been 8.65%. However, the last earnings move has been much milder at +0.6%.

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