Twitter Inc (NYSE:TWTR) heads into earnings Thursday in desperate need of a positive catalyst. Since last quarter’s post-earnings dive, shares of the blue bird have been unable to gain altitude. TWTR stock’s continuous circling of the $40 level has left trend traders and follow-through seekers out in the cold.
And yet, if past earnings announcements are any indication tomorrow’s fireworks could spark a new trend for TWTR stock, ushering in a fresh batch of directional opportunities.
I find the behavior of TWTR since it’s late-2013 IPO to be utterly fascinating. The first week of TWTR stock’s public life found the stock nestled close to $40. And despite numerous attempts to begin some grand trend (up or down), the social media titan keeps returning to the scene of the crime.
As a result of each departure attempt being weaker and weaker, Twitter stock has formed one big symmetrical triangle. With the apex looming, one wonders if the coming breakout will finally bring a lasting trend to the otherwise directionless stock.
On the options front, risk is priced similar to Twitter’s last two earnings announcement. The weekly straddle expiring on Friday is currently pricing in a 12% move by the end of the week. Bear in mind that Twitter stock has a history of large earnings gaps, so 12% doesn’t seem out of line.
TWTR Earnings Option Plays
Here are my top two trade ideas for TWTR earnings.
Traders looking for an upside surprise in shares of TWTR following earnings can structure a high probability trade by selling out-of-the-money puts. Sell the Feb 32.50 puts for 50 cents or better. Consider it a bet that TWTR remains above $32.50 by expiration. By selling the put, you obligate yourself to buy 100 shares of stock at $32.50 — which may not be a bad thing if you were already interested in snatching up shares in the low $30s.
If you’re not interested in making a directional bet into earnings, consider selling volatility with a short strangle. If TWTR moves less than expected, you will score some profits. Sell the Feb 32.50 put and the Feb 48 call for a $1.10 credit or better. Consider it a bet TWTR remains between both prices by expiration.
The reward is limited to the initial $1.10 credit and the risk is theoretically unlimited. To minimize the potential loss keep your position small and consider exiting if TWTR breaks outside the range.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
