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Fake deal aside, traders bet on Twitter rally

Chatter over a potential Twitter takeover has the stock heating up this week.

Shares of the embattled social giant have rallied more than 5 percent in the past five trading sessions; the stock spiked as much as 8 percent on Tuesday shortly after a fake report suggested the company received a buyout offer. Deal or no deal, options traders are betting the rally could continue in the short-term.

Read MoreBloomberg Twitter hoax--how did it happen?

On Tuesday, when options volume ran 2.5 times its daily average and calls outnumbered puts 3 to 1, one trader bet more than $500,000 that Twitter shares could rally another 8 percent in the next month. Specifically, that trader purchased 3,000 of the August 38-strike calls for $1.78 each. Since buying a call allows one the right to purchase a stock at a set price at a given time, this trade is profitable if the stock rises above $39.78 by August expiration.

"This trade really caught my eye because it prior to the fake announcement," options expert and CNBC Contributor Dan Nathan said Tuesday on CNBC's "Fast Money." According to Nathan, the trade crossed the wires at approximately 10 a.m.

Despite this week's spike, Twitter shares have been dead in the water lately, trading in a range from $34 on the low end to $38 on the high end for the better part of the last two months. The stock is down more than 11 percent since its November 2013 IPO.

And Nathan, who is long Twitter call options himself, said he's getting "frustrated" with the recent price action in the stock. "Other than the spike [Tuesday] it looks like it has nothing but sellers, and I suspect if there is a pop to $40 on some deal speculation we will see a lot more sellers," the founder of RiskReversal.com said.

Nonetheless, Wall Street sentiment is quite bullish on Twitter. Of the 38 analysts that cover the stock, the average price target is $45.18 with an overweight rating, according to FactSet.

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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