A Pair of TWTR Option Plays Before Twitter Earnings

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Twitter Inc (NYSE:TWTR) steps up to the plate Tuesday night to deliver what shareholders hope will be some earnings magic. Read on to see what the market expects heading into the blue bird’s big moment.

A Pair of TWTR Option Plays Before Twitter EarningsTWTR shares are on a hot streak ahead of tomorrow’s earnings unveil, up 45% year-to-date. Not bad for five months worth of work. Of course, the stock is still some 30% off its all-time high of $74.73, so let’s not get too giddy.

On the technical front TWTR looks solid. The trend is up, all major moving averages are pointing higher, and signs of distribution have been absent. The stock has tacked on additional gains following January’s earnings-induced price jump.

A Pair of TWTR Option Plays Before Twitter Earnings
Source: OptionsAnalytix

Speaking of earnings announcements, the trend of post-earnings gaps has been utterly random for Twitter. Of its five quarterly earnings releases, three have resulted in down gaps, two have generated up gaps. Guessing gap direction has always been kind of a crapshoot anyway, but using past performance in a stock like Twitter seems to be an especially bad idea.

What does TWTR Volatility say?

For gauging risk expectations heading into Twitter earnings, we turn to implied volatility in the options market. Remember, the higher the implied volatility, the more a stock is expected to move.

Interestingly, the implied volatility of TWTR options is sitting at its lowest pre-earnings level since options began trading on the stock shortly after its IPO. The downward trajectory of its implied volatility since its public debut isn’t all that unique, however. Fellow social media stock Facebook Inc (NASDAQ:FB) has seen its implied volatility declining over time as well.

The volatility chart of TWTR is shown below with the implied volatility in gold. I’ve circled the level of implied volatility ahead of all prior earnings announcements in Twitter.

A Pair of TWTR Option Plays Before Twitter Earnings
Source: iVolatility.com

Regardless of the reason TWTR options are pricing in a smaller earnings gap than all prior announcements. Though small on a relative basis, it’s still a substantial move on an absolute basis. Weekly option contracts are pricing in about a 10% move by week’s end.

2 Trades for TWTR

Traders looking to the roll the dice into Twitter earnings with a directional bias should consider the following pair of trades — they both boast a high probability of success with a respectable margin of error.

Bulls should sell the May $45/$40 bull put spread for 52 cents credit. The reward is limited to the initial 52 cents and will be captured if TWTR stock can remain above $45 by expiration. The risk is limited to the distance between strikes minus the net credit, or $4.48, and will be lost if TWTR tumbles below $40.

Bears should sell the May $60/$65 bear call spread for 54 cents credit. The reward is limited to the initial 54 cents and will be captured if TWTR stock can remain below $60 by expiration. The risk is limited to the distance between strikes minus the net credit, or $4.46, and will be lost if TWTR soars above $65.

At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/a-pair-of-twtr-option-plays-before-twitter-earnings/.

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