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Trader bets $5 million on Twitter turnaround

Twitter shares soared as more than 5 percent Tuesday morning after the company announced it would eliminate 8 percent of its global workforce. News of the plan leaked out on Re/code late Friday, allowing one savvy trader the opportunity to place a bullish bet on a Twitter turnaround.

On Monday, in a trade that raised a few eyebrows in the options market, one trader spent more than $5 million on a bullish bet that Twitter shares will rise 25 percent in the next 16 months.

The trader purchased 10,000 of the January 2017 33-strike calls for $5.15 each. When investors buy call contracts, they are hoping the stock will rise above the strike price by more than the cost of the trade. In this case, the trader will need Twitter stock to rise above $38.15 by the end of January 2017. Twitter hasn't traded above that level since mid-July. Since each call option accounts for 100 shares, the nominal cost of the whole transaction is just north of $5 million.

Read MoreCramer: Expect Twitter to go higher after layoffs

Twitter shares have been under severe pressure of late, down more than 40 percent in the last six months as uncertainty over the company's leadership structure and growth potential weighed on investors. The decline has some wondering if the social giant will be acquired.

"Getting to that breakeven or better is critical to see whether [CEO Jack] Dorsey's ultimate goal is to merge or remain independent," Mike Khouw told CNBC's "Options Action" on Tuesday.

In the short term, Khouw expects the stock to remain under scrutiny. The company is expected to report earnings on Oct. 27. Wall Street analysts polled by FactSet are expecting the company to report fiscal 2015 third quarter results of 5 cents per share on $560 million in revenue. "Given the layoff news, and Dorsey's return, both those numbers now seem unlikely," added the Optimize Advisors co-founder, who questioned why the company would announce layoffs if they "were about to meet or beat the Street's expectations and see positive cash flow and EPS."

Read MoreTwitter names Jack Dorsey CEO; will continue on as CEO of Square

Wall Street analysts tend to side with a Twitter turnaround. Of the 39 who cover the stock, only one rates Twitter a sell. The average rating is overweight with a target of $37.89, according to FacSet.

Disclosure: NBCUniversal is a minority owner of VOX Media, which owns Re/code.

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