TWTR Options

BMK said:
The complete history is a little more complicated.

Prior to July, I had never traded Twitter, and I was never a big fan of the company. In late July, the deal was in limbo. Musk was trying to back out, but Twitter had filed suit to force him to complete the deal, and more than one neutral legal expert had expressed the opinion that it was unlikely that Musk could break the deal or even renegotiate. The trial had been set for late October, and the judge had denied Musk's request to postpone it. On July 21, amid the uncertainty, the stock was trading at about 40, and I decided to bet that the deal would go through, before the trial date in late October, either at the agreed-upon price of 54.20, or at some other price well above 40.

On July 21, I established a synthetic long position at 40 for a net debit of .45, with an expiration of 11/18. This was a single contract, i.e., long the 40 call and short the 40 put.

In early October, Musk announced that he was prepared to complete the deal, on the original terms, but again asked to delay the trial, in order to put all the financing in place. Twitter clearly did not trust Musk, and thought that he might still be trying to escape by claiming that he couldn't get adequate financing, so they wanted to continue with the trial. Musk fired back in a court filing, claiming that Twitter "will not take yes for an answer."

The judge finally put the trial on hold to give the parties time to actually complete the deal. The stock went up as high as 52 for a couple days, and then fell back to 50.

At this point, on October 11, the synthetic long position was behaving exactly as it should. With the stock at 50, the synthetic was worth 10 points, or $1,000. I decided to close the position.

That same day, I established the butterfly, to try to capture the remaining movement from 50 to 52.40, and that is exactly what has happened. I put on the butterfly with 10 contracts, for a net debit of 1.30, or $1,300.00. And for the butterfly I chose the December expiration.

Why, you may ask, did I not simply hold the synthetic position? If I thought the deal was going to go through at 52.40, why not just keep the existing position?

Because I wanted to limit my exposure. The synthetic had a very attractive gain of $1,000. But if the deal collapsed, that gain could easily evaporate, and the stock could very well drop below 40. On the synthetic long position, the max loss was, at least in theory, $4,000, because Twitter could declare bankruptcy and the stock could drop to near zero.

With the butterfly, my max loss was $1,300. But since I had already pocketed a gain of $1,000 from closing the synthetic, my real exposure, on the whole affair, was now only about $300. And the butterfly also allowed me to push the expiration out to December, in case there was a further delay in closing the deal.

When the long calls I am holding cash out at 1.70, my net profit on the whole thing will be $1,346.97, which is almost the same as what it would have been if I had held the synthetic.

View attachment 298761
More...

Overall, a good setup call but if I were you, I would've done a sort of a variation of a collar by either replacing the long call with the strike of $57.50 with a put with strike of $50 or less for your long butterfly or add it to your first synthetic call if you really want to cover all scenarios especially the scenario where the deal doesn't go through. Normally I wouldn't recommend shorting naked calls but in this case because of the extreme special situation where there is a fixed price for the takeover of $54.20, there is virtually no chance that the share price would go over the short strike of $55 so having an extra uncovered short call at $55 is not too bad once you replace the second long call with a long put.

There are only two scenarios with this merger: the deal doesn't go through or the deal goes through but in either case, the second long call with a strike of $57.50 imo is redundant. If the deal goes through, the maximum price Elon will pay is $54.20 so there is no way the price will reach $57.50 so that option will expire worthless regardless and the purchase price spent on that option is a sure loss. In the scenario where the deal doesn't go through, then this 2nd long call is even more redundant. But if the deal really doesn't go through albeit highly unlikely, having a long put will protect you much better than the two short calls if and once the price starts to free fall. So for the same net profit that you would end up having, you would get the extra protection from the put should something happens to the deal. I personally would sleep better with that protective put there.
 
Last edited:
Overall, you traded it better than I did.

Once October 11th hit, the market was pricing something like a 20% chance of the deal closing vs deal absolutely busting. With a call structure, you miss out on the chance that he was able to negotiate a lower price. Albeit this scenario was low at the time, it was definitely higher than the deal completely busting by october 28th.




BMK said:
The complete history is a little more complicated.

Prior to July, I had never traded Twitter, and I was never a big fan of the company. In late July, the deal was in limbo. Musk was trying to back out, but Twitter had filed suit to force him to complete the deal, and more than one neutral legal expert had expressed the opinion that it was unlikely that Musk could break the deal or even renegotiate. The trial had been set for late October, and the judge had denied Musk's request to postpone it. On July 21, amid the uncertainty, the stock was trading at about 40, and I decided to bet that the deal would go through, before the trial date in late October, either at the agreed-upon price of 54.20, or at some other price well above 40.

On July 21, I established a synthetic long position at 40 for a net debit of .45, with an expiration of 11/18. This was a single contract, i.e., long the 40 call and short the 40 put.

In early October, Musk announced that he was prepared to complete the deal, on the original terms, but again asked to delay the trial, in order to put all the financing in place. Twitter clearly did not trust Musk, and thought that he might still be trying to escape by claiming that he couldn't get adequate financing, so they wanted to continue with the trial. Musk fired back in a court filing, claiming that Twitter "will not take yes for an answer."

The judge finally put the trial on hold to give the parties time to actually complete the deal. The stock went up as high as 52 for a couple days, and then fell back to 50.

At this point, on October 11, the synthetic long position was behaving exactly as it should. With the stock at 50, the synthetic was worth 10 points, or $1,000. I decided to close the position.

That same day, I established the butterfly, to try to capture the remaining movement from 50 to 52.40, and that is exactly what has happened. I put on the butterfly with 10 contracts, for a net debit of 1.30, or $1,300.00. And for the butterfly I chose the December expiration.

Why, you may ask, did I not simply hold the synthetic position? If I thought the deal was going to go through at 52.40, why not just keep the existing position?

Because I wanted to limit my exposure. The synthetic had a very attractive gain of $1,000. But if the deal collapsed, that gain could easily evaporate, and the stock could very well drop below 40. On the synthetic long position, the max loss was, at least in theory, $4,000, because Twitter could declare bankruptcy and the stock could drop to near zero.

With the butterfly, my max loss was $1,300. But since I had already pocketed a gain of $1,000 from closing the synthetic, my real exposure, on the whole affair, was now only about $300. And the butterfly also allowed me to push the expiration out to December, in case there was a further delay in closing the deal.

When the long calls I am holding cash out at 1.70, my net profit on the whole thing will be $1,346.97, which is almost the same as what it would have been if I had held the synthetic.

View attachment 298761
More...
 
TheDawn said:
Overall, a good setup call but if I were you, I would've done a sort of a variation of a collar by either replacing the long call with the strike of $57.50 with a put with strike of $50 or less for your long butterfly or add it to your first synthetic call if you really want to cover all scenarios especially the scenario where the deal doesn't go through. Normally I wouldn't recommend shorting naked calls but in this case because of the extreme special situation where there is a fixed price for the takeover of $54.20, there is virtually no chance that the share price would go over the short strike of $55 so having an extra uncovered short call at $55 is not too bad once you replace the second long call with a long put.

There are only two scenarios with this merger: the deal doesn't go through or the deal goes through but in either case, the second long call with a strike of $57.50 imo is redundant. If the deal goes through, the maximum price Elon will pay is $54.20 so there is no way the price will reach $57.50 so that option will expire worthless regardless and the purchase price spent on that option is a sure loss. In the scenario where the deal doesn't go through, then this 2nd long call is even more redundant. But if the deal really doesn't go through albeit highly unlikely, having a long put will protect you much better than the two short calls if and once the price starts to free fall. So for the same net profit that you would end up having, you would get the extra protection from the put should something happens to the deal. I personally would sleep better with that protective put there.
More...

Special dude,

He wasn’t long a synthetic call from inception. He was long synthetic shares from 40.45.

The 57.5 call vol was trading at deal-certainty (10 vol?). The OP can trade a long call fly for a tiny premium over shorting the call backspread/ratio write and not carry any margin on the backspread.

Just stop. Go read a book. It will keep you from writing these special missives.
 
when I trade I would rather pay $8 of risk haircut rather than cover it all for a penny.


destriero said:
Special dude,

He wasn’t long a synthetic call from inception. He was long synthetic shares from 40.45.

The 57.5 call vol was trading at deal-certainty (10 vol?). The OP can trade a long call fly for a tiny premium over shorting the call backspread/ratio write and not carry any margin on the backspread.

Just stop. Go read a book. It will keep you from writing these special missives.
More...
 
BMK said:
What are you talking about?

Is this posted in the wrong thread by accident?
More...

No, what I want to ask is that Microsoft and Activision acquisition option play. It seems the gap is 20 bucks. Food for thought.
 
destriero said:
Or buy a put to give back $3 to the mkt. The fly was fine. My GF Dawn needs to stop with the Dunning Kruger diarrhea.
More...

I think the fly gave up one outcome but otherwise I agree.

the fact that he got premium for the 55 call was a big miss on my part.
 
Overnight said:
I think you mean an iron condor. No worries, there's a way to remember the terminology...


Getting shot in the chest helps you to remember terminology discipline...
More...

I think Manhunter is one the best films of the twentieth century. But many people have never heard of it, and they don't understand how it is related to Silence of the Lambs.
 
You must log in or register to reply here.
Back
Top