Unusual Options Activity for Twitter (TWTR) Underscores Political Sensitivities

While a popular social media platform – particularly among celebrities hawking their latest products or events – Twitter (TWTR) has in recent years courted political controversies. Given its tremendous reach, the company’s ability to censor what it feels is dangerous or intentionally misleading content fuels criticism of undue influence. That matter came to an ugly head following the contentious 2020 election. And with the midterms coming up, many people have adopted a bearish take on TWTR stock.

By pure numbers, it’s difficult not to feel some concern about Twitter. Although the company rates highly within the broader interactive media industry for longer-term growth, it features some questionable financial metrics. For instance, while its Altman Z-Score of 3.84 reflects decent stability of the balance sheet, it’s trending in the wrong direction.

Most notably, Twitter’s return on equity currently resides in negative territory, to the tune of 1.64%. In contrast, the median ROE for the interactive media industry is 1.18% above parity. Unfortunately, this statistic reflects a lower-than-desirable level of business quality.

Still, the upcoming midterm elections presents a potentially powerful upside catalyst. To be fair, several social media firms are bracing for mayhem in the blogosphere. With many people likely to feel bitter about whatever the results may be, administrators seeking to excise objectionable – even reprehensible – content will probably have their hands full.

Nevertheless, the social media industry may enjoy a net benefit with so much rancor. In a way, there’s no such thing as bad publicity in this space. As well, several if not most politicians have a Twitter account, along with legions of partisan organizations. On balance, the imminent battle at the ballots may boost TWTR stock.

However, many traders don’t see it that way and they let their feelings be known in the options market.

TWTR Stock Attracts the ‘Haters’

Following the conclusion of the Oct. 21 session, TWTR stock became one of the subjects of unusual options activity. Specifically, bearish traders targeted two put options. First, they bid up the $44 puts with an expiration date of Nov. 4, 2022. Second, they moved in on the $44.50 puts with an expiration date of Oct. 28 – this coming Friday.

For the former put, volume reached 19,152 contracts against an open interest reading of 328. The bid-ask spread as represented by the midpoint price ($2.01) came out to an incredibly wide 37.8%. Usually, such massive margins indicate low liquidity and thus low demand.

For the latter transaction, volume reached 4,127 contracts against open interest of 249. Here, the bid-ask spread as represented by the midpoint price ($1.48) came out to 2.7%, a much more reasonable margin.

For the record, TWTR stock closed at $49.89 in the open market last Friday.

Although Twitter has so far enjoyed a relatively strong performance this year – gaining 17% since the January opener – the predominant trend in the options market has been bearish. According to data from Barchart.com, the put/call open interest ratio for TWTR stock is 0.97. Usually, the delineation between bullish and bearish sentiment is 0.70, with ratios higher than this level indicating that more traders are buying puts than calls.

In addition, analysts remain pensive about the prospects for TWTR stock. Three months ago, only one covering analyst gave Twitter a “strong buy” rating. Everybody else rated it a “hold.” In the current month, 20 out of 20 analysts agree that TWTR is a “hold” – hardly inspiring material.

Twitter Caught in a Moral Dilemma

According to the Associated Press, Twitter represents one of several social media platforms that have expanded their work “to detect and stop harmful claims that could suppress the vote or even lead to violent confrontations.”

However, the AP’s review of these sites “shows they're still playing catch-up with 2020, when then-President Donald Trump's lies about the election he lost to Joe Biden helped fuel an insurrection at the U.S. Capitol.”

Presumably, then, Twitter needs to bolster its censorship protocols to address harmful information disseminated on its platform. That might be the right step for the advancement of democracy. However, such directives might also clash with basic capitalistic principles.

Essentially, only Democrats “benefit” from censorship protocols as big tech firms generally lean to the left ideologically. However, Republicans and those with conservative viewpoints represent a massive component of the population. Thus, engaging in measures that stymie their voices or otherwise impugns their belief systems could be problematic for TWTR stock.

After all, part of the reason why social media is such a robust engine of public discourse is that contrarian voices can chime in. Ensuing debates, while perhaps not conducive for civility nevertheless helps pad the bottom line.

In a cycle where digital ad spending is declining, Twitter may be taking a big risk acting as the political moral police. Therefore, the unusually high-volume puts against TWTR stock aligns with a logical framework, even if disagreeable to many.

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