Shares of Twitter (TWTR) have been left for dead.
At least that’s the message being broadcast in the options market.
Despite TWTR stock having cascaded a gut-wrenching 28% following April’s discouraging earnings release, risk in the wounded blue bird is being priced near an all-time low.
In other words, option traders are betting TWTR stock volatility is going to behave more like a staid old consumer staple stock than the erratic high-flier its been in days past.
I suspect, however, the volatility shellacking in Twitter options is overdone and premiums have been driven into fire sale territory. Traders looking to initiate positions in TWTR can now do so by snatching up calls or puts on the cheap.
With Twitter stock already having descended so far from its lofty heights, the more attractive play here is a bullish one. As the chart below can attest, TWTR stock is languishing near a longer-term support level near $36, which should help to stem the decline.
Better yet, it may serve as a catalyst for some type of rebound in the deeply oversold stock.
Calling All Twitter Bulls
Couple the oversold conditions with an options fire sale and we have an attractive situation to snatch up longer-dated call options. Buy the Sep $36 calls for around $3.75.
The risk is limited to the initial $3.75 debit and will be forfeited if TWTR fails to sit above $36 by September expiration.
The reward is unlimited offering powerful profit potential should the blue bird soar once more.
Since September options have four months of time, you could consider tactically selling short-term calls against your long call to incrementally reduce your basis.
For example, if we get a bit of a pop in Twitter stock in the coming week you could sell the Jun $39 call for, say, 75 cents. That would reduce your overall trade debit from $3.75 to $3.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
