TWITTER: Twango On A Special Situation
Jack Dorsey out, Twitter becomes more tradable for us.
Elon Musk comes in with a high offer of 54.20.
Premium above 54.20 should be 0 in most scenarios.
Selling premium at 55 or above seems a no-brainer.
1. Why Do I Care Right Now?
I was reasonably happy to see Jack Dorsey leave Twitter, a company with enormous potential and an even more significant hidden value more likely than ever to be unlocked finally. At the end of March 2022, when TWTR price seems to bottom and the chart is creating a higher high (red circle on chart below), I went long the Call 40, Jan 2024.
A few sessions later, the price jumps from USD 40 to 54 - Elon M. has a vision for Twitter… Although the call options value doubles within a week, all long-term aspirations to multi-bag my returns are gone.
2. Useful Background Information
I like to sell premium against my LEAPs with shorter-dated front month calls a few strikes higher. It pays for the long call premium, reduces capital employed, and hedges against sideways or downwards risk. Short Call 55, May 20, for that matter, luckily, we chose the strike right above Elon’s USD 54.20 offer.
Why do I write about an old idea? Because this is my first article. But also, being long TWTR while shorting 55 front-month calls inspired me to look a little closer into premium-selling at 55 or higher and use the 54.20 as an invisible cap.
Have a look at the call premiums highlighted in yellow. See what I see?
The front-month Call 55, Sep 16, trades at 0.70 while Jan 2024 trades at more than 2.00 - they should be 0 if Elon M. buys Twitter for 54.20 per share.
It seems like a no-brainer to sell any premium above 54.20 if you believe the deal goes through at that price or lower. For the sake of simplicity, I will focus again on the 55 strikes.
I believe in 4 scenarios, 1) deal for 55 or less, 2) deal for more than 55, 3) no clarity on a deal for a longer time, or 4) no deal.
Deal for 55 or lower: premiums become worthless.
Deal above 55: premium will increase to the higher price negotiated minus 55.
No clarity on the deal: front-month 55 premiums will decrease over time, and Jan 2024 premiums could fluctuate a fair bit.
No deal: Assuming the underlying price will not react too much to a no-deal announcement, the value of the 55 premiums will increase due to less certainty and increased implied volatility. If the price of the underlying falls back to pre-deal announcement levels (39-40), the value of the 55 premiums will most likely decrease relative to current values.
3. Trade Execution
Selling Call 55, Jan 2024, and hedging against scenarios 2 and 4 via buying the Sept 16, 55 call results in a credit of more than 1.30.
Trade Entry - Apr 27, 2022
1) Short Call 55, Jan 2024: 2.04 Credit.
2) Long Call 55, Sep 2022: 0.69 Debit.
Total: 1.35 Credit.
The most significant risk is scenario 3. Here the situation needed to be more actively managed. In all three other scenarios, the 1.30 or at least parts of it should be money in the bank.
4. Final Comments
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