UOA Following Musk-TWTR Calls for 50% Downside in TSLA

Awkward: Buying TWTR after complaining about it for months. Scoop: Elon Musk has agreed to take the original TWTR deal to buyout the company for $54.20 per share. Some option buyers are predicting this could be the beginning of a massive plunge in Tesla shares.

Justin Nugent

This article was last updated on 10/04/2022.

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Shares of Twitter were halted in mid-day trading on October 4th following a >12% rally on news that Tesla CEO Elon Musk has once again proposing to buy the social media company for $54.20 a share. 

Why Did the Twitter Deal Take So Long?

Over the past few months, a public showdown has taken place between Musk and the Twitter board where the Tesla CEO attempted to void the deal originally proposed in April on the premise that Twitter did not provide adequate accounting for the percentage of “bot accounts.” Bot accounts are fake accounts, automatically generated for the purpose of purporting a certain message — often political.

When Musk originally made the deal, Twitter exec’s claimed that Twitter’s account pool was likely 5% bot. After discovering the process that Twitter uses to make that determination, Musk became upset, alleging that Twitter may actually be as much as 90% bot accounts.

The issue: Musk waived all rights to due diligence in his pursuit of a quick deal. Moreover, the judge in Musk’s case is a prolific M&A hawk who has presided over cases like this before. Some have speculated that it was even possible that Musk would have to pay extra fines for the public battle that directly followed the deal. This may have been part of the impetus for Musk’s sudden change of heart before the courtroom finale was scheduled to take place.

Twitter Stock Market Reaction

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Twitter shares initially halted at 12:13PM EST. As of 1:32PM, TWTR shares remain halted at $47.93. Source: TradeWeb, Google

If the deal goes through, Twitter shareholders will be compensated at $54.20, and the company is expected to be taken private by the Tesla CEO. That would indicate more than 13% upside from here.

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Tesla Stock Market Reaction

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Shares of Tesla were originally trading higher today but have since given back nearly all of the day’s gains. Source: TradeWeb, Google

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Unusual Options Activity in Twitter Before the Deal

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Market Rebellion’s Unusual Options Activity

All throughout September, with Twitter trading as low as $38.28, bullish buyers have been coming in to bet on the success of the Twitter deal. With today’s enormous rally, and more upside to come (if the deal goes through), these bullish options are looking to be incredibly successful trades. But there’s another side to this coin: The bearish option bets made against Tesla.

Unusual Options Activity in Tesla Before AND After the Deal

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Market Rebellion’s Unusual Options Activity

That original purchase of Tesla put spreads was made with TSLA shares trading at $275.56, and reaches maximum profit if Tesla drops to $240. At the time of writing, Tesla shares nearly -12% lower from the trade price, valued at just $242.77. As a result, these put spreads have doubled in value. This isn’t just the work of Musk’s Twitter deal — Tesla reported disappointing Q3 deliveries earlier this week, sinking the stock value by more than 8% in a single day. Shares were looking to reclaim some of their gains at the open, but have since given nearly all of today’s positive performance back.

It doesn’t look like the institutional buyers are done, either. 18,000 weekly puts were bought this morning for more than $14M. Then, following the news of Elon’s buyout, another 5,000 put options were bought for next week. The strike: $210. To cap it off, yet another trade was made immediately after — this one’s a doozy. 10,000 January puts at the $120 strike — indicating downside of more than 50%! That’s a truly bold bet.

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