Twitter volume spikes and stock options pricing

The stock market is a popular topic in Twitter. The number of tweets concerning a stock varies over days, and sometimes exhibits a significant spike. In this paper, we investigate the relationship between Twitter volume spikes and stock options pricing. We start with the underlying assumption of the Black–Scholes model, the most widely used model for stock options pricing, and investigate when this assumption holds for stocks that have Twitter volume spikes. We find that the assumption is less likely to hold in the time period before a Twitter volume spike, and is more likely to hold afterwards. In addition, the volatility of a stock is significantly lower after a Twitter volume spike than that before the spike. We also find that implied volatility increases sharply before a Twitter volume spike and decreases quickly afterwards. In addition, put options tend to be priced higher than call options. Last, we find that right after a Twitter volume spike, options may still be overpriced. Based on the above findings, we propose a put spread selling strategy for stock options trading. Realistic simulation of a portfolio using one year stock market data demonstrates that, even in a conservative setting, this strategy achieves a 34.3% gain when taking account of commissions and ask-bid spread, while S&P 500 only increases 12.8% in the same period. © 2015 Elsevier B.V. All rights reserved.