Short Sellers Miss Payout From Twitter Stock Tumble

Short sellers abandoned their bets just before Twitter Inc. started a 27% tumble, the worst five-day performance since its trading debut in 2013.

Twitter had been a target for bearish traders this year, with short wagers reaching a record 8.8% in May, data from IHS Markit show. But short sellers started closing out their bets on Sept. 23, when reports surfaced that potential buyers were circling the social-media company.

Bearish traders cut their wagers from 7% of shares on loan on Sept. 22 to 3.8% on Oct. 5, when the shares began the biggest five-day slump ever on reports that bidders for the company were dropping out.

"Short sellers were scared off by the recent takeover rumors and they missed out on the recent selloff," said Simon Colvin of IHS Markit. Now, the stock is languishing at levels below where it was before the takeover reports. Twitter closed Wednesday at $18.05 a share, after reaching a high of $24.87 last week.

Twitter's shares have been whipsawed by whether the company will find a bidder after years of struggling to keep up the pace of user growth and boost revenue. The Wall Street Journal reported earlier this week that Salesforce.com Inc. is reconsidering its interest, and that Walt Disney Co. and Alphabet Inc.'s Google are also unlikely to bid.

Volatility in the stock over the past 30 days reached the highest it has been in the last year, Trade Alert data show. The stock's wild trading may have scared off shorts. Sellers are having one of their better years in 2016, causing them to be reluctant to make bold bets. The HFRI EH Short Bias Index is up 3.2% in 2016, after posting an annualized loss of 8.7% in the last five years.

Options trading offers clues on sentiment surrounding the stock. The cost of bullish options, or calls, has climbed relative to prices for bearish contracts, or puts, according to Alex Kosoglyadov, director of equity derivatives at BMO Capital Markets. The market is signaling the stock could climb, he said.

Twitter isn't part of the S&P 500 Index, but if it was, it would have the second-highest implied volatility out of all member stocks as of Wednesday, according to Christopher Jacobson, a derivative strategist at Susquehanna Financial Group.

"Call buyers could be positioning for the potential of renewed M&A speculation and a rebound in the stock," said Mr. Jacobson, adding that no one knows what the endgame is for Twitter.

Twitter releases earnings on Oct. 27 and options prices are indicating a 16% swing by the stock after the report, Trade Alert data show. Shares plunged in seven of the last eight quarter, with the average move being 11%. The company has never reported a quarterly profit since its initial public offering, according to generally accepted accounting principles, Factset data show.

Investors still bullish on Twitter could take advantage of the volatility by putting on a call spread—a trade that entails buying calls with a strike price of $21 that expire Nov. 18, while selling twice as many calls with a strike price of $25 and the same expiration, said BMO's Mr. Kosoglyadov.

The potential profit from the trade is 10 times the premium investors need to spend, Mr. Kosoglyadov said.

Write to Gunjan Banerji at [e-mail]

(END) Dow Jones Newswires

October 13, 2016 10:35 ET (14:35 GMT)

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