Bulls quintuple money in $TWTR

Shares of Twitter gapped up this morning, handing exponential gains to bullish option positions opened last month.

On May 4, Investitute’s proprietary programs showed that 5,000 $35 calls expiring on July 20 were purchased in one print for $1.10 with shares at $30.61. These were clearly new positions, as open interest in the strike was only 1,293 contracts before the activity appeared. Investitute’s co-founder Jon Najarian cited the unusual call buying in the name that day on CNBC’s “Halftime Report.”

Last night, it was announced that TWTR would be added to the S&P 500 index. The addition of a new company necessitates that funds that track the performance of the index buy the newly added stock to gain exposure to its performance. Moreover, the investors were likely betting that the annual shareholder meeting, which was slated to take place on May 30, would add conviction to their bullish thesis.

Those July $35 calls were sold for as much as $5.70 today, more than 5 times their initial purchase price. The stock rose 31% in the same time frame, a large move but still nowhere near that of its options on a relative basis.

Long calls lock in the price where investors can buy a stock, letting them position for a rally at limited cost with the potential for significant leverage. They carry less risk than owning shares because the most that can be lost is the price of the options no matter how far the stock might fall.

TWTR spiked higher by 5.07% to close at $39.80 today.