Twitter (TWTR) is on the docket to release its second-quarter earnings figures after the close of trading Tuesday afternoon. Wall Street has set some pretty high targets for the report, and options traders are expecting a rather large move from the TWTR stock price.
And while I typically like to play the role of the contrarian, the best options trade ideas for TWTR stock seem to go with the crowd. So let’s dive into the earnings mix, then look at a couple potential trades.
By the numbers, Wall Street is expecting a 50% year-over-year jump in Twitter’s second-quarter earnings. The consensus is currently looking for a profit of 4 cents per share, up from 2 cents per share a year ago. Meanwhile, revenue is seen rising 54% from the same quarter last year.
Expectations are somewhat muted from the brokerage community. While EarningsWhipser.com reports a whisper number of 5 cents per share, only 13 of the 38 analysts following TWTR stock rate it a “buy” or better. With 24 “holds” and one “sell” rating, there is plenty of upgrade room that could provide a post-earnings boost for TWTR stock — if the company meets or beats expectations, of course.
Elsewhere, Twitter’s sentiment is on the rise among hedge funds. According to data from Octa Finance, 301 investment professionals have increased their holdings or initiated new positions, while just 181 have sold or decreased their positions in TWTR stock. This positive shift in sentiment toward Twitter could hint that hedge funds believe that the stock’s trend is about to shift higher.
Options traders are also starting to lean bullish on Twitter shares. Currently, the July/August put/call open interest ratio for TWTR comes in at 0.87, with calls just edging out puts among near-term options. However, this ratio plunges to 0.65 when we look at just the weekly July 31 series of options (i.e., those that are most affected by Twitter’s earnings). With TWTR starting to see an uptick in call volume, look for this ratio to potentially head lower ahead of Twitter’s report.
Click to Enlarge Overall, weekly July 31 series implieds are pricing in a potential post-earnings move of about 14% for TWTR stock. This places the upper bound at $40.45, while the lower bound lies at $30.55.
On the upside, TWTR is looking at round-number resistance at $40, with its 200-day moving average looming just above $41. On the downside, TWTR is facing multi-year lows should it fall to the $30 region.
2 Trades for TWTR Stock
Call Spread: With Twitter looking at 50% increases in both earnings and revenue, increased hedge fund activity and takeover rumors constantly swirling at the fringes, I’m inclined to side with the bulls heading into tomorrow’s quarterly report. Traders looking to follow suit may want to consider an Aug $36/$40 bull call spread.
At last check, this spread was offered at $1.30, or $130 per pair of contracts. Breakeven lies at $37.30, while a maximum profit of $2.70, or $270 per pair of contracts, is possible if TWTR closes at or above $40 when August options expire.
Put Sell: For those not wanting to place an outright bullish bet on TWTR stock, a weekly July 31 series $29 put sell may be just the option you’re looking for. At the close of trading on Friday, the July 31 $29 put was bid at 45 cents, or $45 per contract.
As long as TWTR trades above $29 through July option expiration at the end of this week, traders who open this position will keep the initial premium received. However, if TWTR trades below $29 before Friday’s close, you may be assigned 100 shares for each contract sold at a cost of $29 each.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
