Will You, Retail Investor, Lose Money On Your TWTR Call Options? (If Elon Takes Twitter Private)
This article is about me.
Last Monday, Twitter announced it entered a final agreement to be acquired by Elon Musk for $54.20 per share in cash, totaling roughly $44 billion. Ultimately a shocking blow to the most bullish of TWTR options holders, who either purchased LEAPS at TWTR’s $73.34 peak (that’s me), or calls deep out-the-money (OTM). Their future looked so bright when Elon purchased a 9% stake in the company, but now they’re scrambling for answers and direction, and want to know how much money they may lose.
The deal is still in the process of closing, as it’s waiting for shareholder and regulatory approval and other closing conditions. Elon also could change his mind, but would have to pay a $1 billion breakup fee. It’s important to understand there is no guarantee the deal will close, and the probability that it will remains uncertain.
For the sake of this article, I’m assuming the deal will go through, and Twitter will be taken private sometime in 2022 as reported. Now, let’s try to figure out how much money we might lose by exploring the following questions:
If I have TWTR call options, what can I do right now? What will happen to them once TWTR goes private?
Right now, your “options” for your calls are to sell, execute, or hold.
You can sell them right now at the current market price of $49 and collect the premium. Should you do that, I’d first consider your strike price and expiration.
If your calls are OTM–or have a strike price above the buyout price of $54.20 per share–they will be worthless once TWTR goes private and you will take a maximum loss.
If your calls are in-the-money (ITM)–or have a strike price below $54.20 per share–it will be worth the difference between $54.20 and your strike when TWTR goes private. Subtract what you paid in premium from the difference to get your profit/loss.
Take me for example:
I have three TWTR options with a $40 strike expiring on 1/20/23. They will each be worth $1,420 ($54.20-$40) once TWTR goes private. I paid $20.20 for each option–or $2,020–so I will lose $600 (14.20-20.20) per option.
Right now, my calls are only worth $11.38 each with TWTR at $49.16, so it doesn’t make sense for me to sell unless the price rises above $54.20.
This brings us to our next option, which is to hold.
That is, if you have the luxury of time. We’ll use my example again. Since I assume the deal will go through, and because my options expire in Jan. 2023, I’m holding until the deal closes and will take a reduced loss. Of course, I’m only doing this because I’m willing to risk my options (most likely) imploding if the deal doesn’t go through.
If your options expire soon—from weeks up to three months—you’re in a tougher spot. Even if the deal goes through, it may not be before your calls expire. But unless you purchased calls at TWTR’s peak like myself, you should still be profiting from their 45% jump in the last three months.
And finally, you can execute your options.
You’d be forfeiting the premium you’d get by selling them instead…which wouldn’t make much sense unless they’re super deep ITM and close to expiration…or because there’s some weird tax reason I don’t understand.
But you have the option to do it.
At the end of the day, Elon taking Twitter private is a major disappointment to the shareholders that believe in the company the most, but it’s what needs to be done for Twitter to truly be a platform for free speech—and to actually make some damn money. He needs full control to make the changes Jack Dorsey and the rest of Twitter’s do-nothing, loser CEO’s never did. Elon is actually expected to serve as temporary CEO after the deal closes, in which case I expect him to clean house and hire me, because now I need money.