1. Written and Illustrated by: yours truly
TWTR Put Backspread
Written and Illustrated by: yours truly

2. What’s Happening
On September 22, rumours emerged about a potential TWTR acquisition
On the 23rd, TWTR announced they were looking to sell themselves
Google, Disney, Salesforce, and Microsoft were all named as potential suitors
Over the next week, TWTR announced that they would be fielding bids for another two weeks
October 5th, Google announced they would not be bidding for TWTR, disney and Microsoft soon followed suit.
October 15th, Salesforce announced they would not be bidding either

3. Price Points Prior to merger, TWTR traded around $18
Post merger news, it traded at $24
TWTR announced they wanted 20 billion for the company, approximately a $30+ valuation per share
Post Google back out it traded at $18+
Now it trades between $16.5 and $17

4. What I did
What I did was I bought 2 of the 20 puts and sold one of the 23 puts recieving 2.4 for the 23 put and paying .9 each for the 20 put which is 1.8 in all. Each had a november expiration
I received a 60 cent per share of the 2:1 spread in premium.
The skew of the two puts was a 1.7 which is very cheap with the atm being a 73 and the otm being a We entered the position when the stock was trading around 23.

5. Breakevens and payoffs
Should the stock stay above $23 at expiration, we keep the 60 cent premium which would give us .6*50000=30000
Our max loss is at $20 where we would lose 2.4*50000= (we sold 500 puts each representing a 100 shares, 500*100) with a breakeven point at , and 17.6.
Once the stock fell below 20, we started to recoup losses and then at 17.6, we made money.
50000(500*100)*17.6(breakeven)-16.5(current market price)=55000.

6. Basis of the Strategy
You are betting that if a stock moves a certain way, it will move drastically. You are essentially long gamma

7. Notes and Questions
Some of you may have noticed that on the downside, I multiplied by 500 options instead of the full 1000 that I purchased, the reason for this is because at 23, I am short 500 puts, at 20, I go long 1000 puts, and short 500 puts, which nets out to long 500 puts. Therefore, there is a cancelling effect.
Actual return for liquidating would be 3.65* =1.5*50000=75000/120000=.625
When calculating ROI, you take the total risk, for instance, my max loss could have been if everything went as wrong as physically possible, so my ROI would be (55000/120000)=.46 ( it is actually most likely slightly higher because I’m long gamma but that's for another day and we are only doing intrinsic value right now