Hello friends.
We previously called the exact bottom of Twitter stock by using a probability analysis showing that Twitter was dramatically undervalued based on the market's expected probability of a Twitter buyout. Since then we have made even more money from Twitter stock, and we will explain our strategy moving forward.
Polymarket says the probability of a Twitter buyout by the end of 2022 is 26%.
There's also a far more liquid options market for Twitter buyout calls. These calls expire slightly later on January 20th, 2023, with a strike price of $52.50. The max value for a call would be realized if there was a buyout for $54.20, and then the calls would be worth exactly $1.70 each. The current value of one of these call options is $0.45. If you take the price ($0.45) minus the max profit ($1.70), you get $1.25. This is the maximum profit if a trader were to buy calls at this price. Now that we have calculated these figures, we can actually use a fancy trick to derive the Implied Probability. Implied probability is an estimate of a prediction market outcome’s probability based on that outcome’s payoff. (Make sure never to pay the high spread when trading these options, since the spread is around 25% and it will eat you for breakfast if you use a market order.)
In this case, the payoff is $1.25 and the risk is $0.45. So you can take 1.25 / 0.45 and you will get 2.77 repeating. To put it another way, the market is saying that the odds of Elon buying Twitter are 1 in 2.77. You can also convert this fraction to a percentage so it's easier to work with. After doing this, we see that the options market thinks the probability of a buyout is 36%.
We can also utilize data from a non-cash-based prediction market named Manifold Markets. This platform pegs the odds of Musk buying Twitter this year at 28%, but it also adds an interesting nuance to the picture. It has the odds that "Will a Delaware judge order Elon Musk to complete the Twitter deal at the original terms?" resolves to YES set at 42%. This tells us loud and clear that the market is pricing in a high probability that even if Elon Musk is ordered by the judge to complete his transaction on the agreed terms, he might simply refuse to do it. Some have speculated that he could even end up in jail for doing this. Luckily, the legal officials should have access to liquidate his Tesla stock holdings and his bank account if needed, in order to facilitate the trade. That is why, in my opinion, the probability that Elon Musk does not buy Twitter given that Elon Musk is ordered by the judge to buy Twitter is extremely low, probably below 10%.
We can also take a look at what the Twitter stock itself says about this buyout since the stock is literally its own highly liquid makeshift prediction market about what will happen. The price of Twitter is currently trading at $42.19. If Twitter wins this case and Musk buys Twitter stock for $54.20, the price will increase by $12.01. If Musk wins this case and does not have to buy Twitter, I estimate that the stock will gap down to around $32.00 instantly. This would be a decrease of $10.19 from the current prices. Note that the price which Twitter would go to, given the deal falls through, is quite subjective. I derived my own estimate by looking at the volume profile and noticing that there is a substantial chunk of support around the $32 area, but others may think that the value should be higher or lower, and this would certainly impact their analysis of the probability.
Given my assumption about Twitter going to $32 in the case of Musk winning is true, the implied probability of a buyout based on the stock price itself is actually a lot higher than the prediction markets and options markets. The reward is $12.01, and the risk is $10.19. The reward is 1.18 times larger than the risk, so this market says that a buyout is slightly less likely than no buyout. This sets the buyout odds at something like 46%. It's possible that in reality, the price would fall much further if the Twitter buyout failed, so this could explain the outlier in the implied probability. But it might also not explain it at all. It's not something you can know for sure one way or another.
So really there are a lot of different markets, and all of them are pricing the probability of a Twitter buyout slightly differently. How can we take advantage of this? I would say, arbitrage is not really a super safe idea because many of these markets are slightly different in terms of their expiration date. Really it's just better to make sure you are placing your bets in the most efficient place. If you want to bet against a Twitter buyout, you should be shorting the highest implied probability asset. At the moment, that's Twitter stock. If you want to bet on a Twitter buyout, you should be buying the lowest implied probability asset. That's currently Polymarket, although the liquidity on there is not amazing.
Myself I ended up buying a boatload of Twitter calls at a price of $0.35 because I thought they were dramatically undervalued. I will probably try to sell them now that the market has increased the price to a far more reasonable level, and simply move my Twitter buyout bets over from the options market onto Polymarket. This kind of transition will let me sell the higher implied probability asset and buy the lower implied probability asset, to get a better deal. Sadly the Polymarket pool does not have enough liquidity to match my size, so this strategy's effectiveness is limited.
We hope you found this deep dive into Twitter buyout odds markets useful.
We previously called the exact bottom of Twitter stock by using a probability analysis showing that Twitter was dramatically undervalued based on the market's expected probability of a Twitter buyout. Since then we have made even more money from Twitter stock, and we will explain our strategy moving forward.
Polymarket says the probability of a Twitter buyout by the end of 2022 is 26%.
There's also a far more liquid options market for Twitter buyout calls. These calls expire slightly later on January 20th, 2023, with a strike price of $52.50. The max value for a call would be realized if there was a buyout for $54.20, and then the calls would be worth exactly $1.70 each. The current value of one of these call options is $0.45. If you take the price ($0.45) minus the max profit ($1.70), you get $1.25. This is the maximum profit if a trader were to buy calls at this price. Now that we have calculated these figures, we can actually use a fancy trick to derive the Implied Probability. Implied probability is an estimate of a prediction market outcome’s probability based on that outcome’s payoff. (Make sure never to pay the high spread when trading these options, since the spread is around 25% and it will eat you for breakfast if you use a market order.)
In this case, the payoff is $1.25 and the risk is $0.45. So you can take 1.25 / 0.45 and you will get 2.77 repeating. To put it another way, the market is saying that the odds of Elon buying Twitter are 1 in 2.77. You can also convert this fraction to a percentage so it's easier to work with. After doing this, we see that the options market thinks the probability of a buyout is 36%.
We can also utilize data from a non-cash-based prediction market named Manifold Markets. This platform pegs the odds of Musk buying Twitter this year at 28%, but it also adds an interesting nuance to the picture. It has the odds that "Will a Delaware judge order Elon Musk to complete the Twitter deal at the original terms?" resolves to YES set at 42%. This tells us loud and clear that the market is pricing in a high probability that even if Elon Musk is ordered by the judge to complete his transaction on the agreed terms, he might simply refuse to do it. Some have speculated that he could even end up in jail for doing this. Luckily, the legal officials should have access to liquidate his Tesla stock holdings and his bank account if needed, in order to facilitate the trade. That is why, in my opinion, the probability that Elon Musk does not buy Twitter given that Elon Musk is ordered by the judge to buy Twitter is extremely low, probably below 10%.
We can also take a look at what the Twitter stock itself says about this buyout since the stock is literally its own highly liquid makeshift prediction market about what will happen. The price of Twitter is currently trading at $42.19. If Twitter wins this case and Musk buys Twitter stock for $54.20, the price will increase by $12.01. If Musk wins this case and does not have to buy Twitter, I estimate that the stock will gap down to around $32.00 instantly. This would be a decrease of $10.19 from the current prices. Note that the price which Twitter would go to, given the deal falls through, is quite subjective. I derived my own estimate by looking at the volume profile and noticing that there is a substantial chunk of support around the $32 area, but others may think that the value should be higher or lower, and this would certainly impact their analysis of the probability.
Given my assumption about Twitter going to $32 in the case of Musk winning is true, the implied probability of a buyout based on the stock price itself is actually a lot higher than the prediction markets and options markets. The reward is $12.01, and the risk is $10.19. The reward is 1.18 times larger than the risk, so this market says that a buyout is slightly less likely than no buyout. This sets the buyout odds at something like 46%. It's possible that in reality, the price would fall much further if the Twitter buyout failed, so this could explain the outlier in the implied probability. But it might also not explain it at all. It's not something you can know for sure one way or another.
So really there are a lot of different markets, and all of them are pricing the probability of a Twitter buyout slightly differently. How can we take advantage of this? I would say, arbitrage is not really a super safe idea because many of these markets are slightly different in terms of their expiration date. Really it's just better to make sure you are placing your bets in the most efficient place. If you want to bet against a Twitter buyout, you should be shorting the highest implied probability asset. At the moment, that's Twitter stock. If you want to bet on a Twitter buyout, you should be buying the lowest implied probability asset. That's currently Polymarket, although the liquidity on there is not amazing.
Myself I ended up buying a boatload of Twitter calls at a price of $0.35 because I thought they were dramatically undervalued. I will probably try to sell them now that the market has increased the price to a far more reasonable level, and simply move my Twitter buyout bets over from the options market onto Polymarket. This kind of transition will let me sell the higher implied probability asset and buy the lower implied probability asset, to get a better deal. Sadly the Polymarket pool does not have enough liquidity to match my size, so this strategy's effectiveness is limited.
We hope you found this deep dive into Twitter buyout odds markets useful.
Comment:
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