Twitter (TWTR) stock is on the ropes … again. It’s essentially the anti-Facebook (FB). Both are social media darlings, but their stocks are traveling in opposite directions. While Facebook’s flight path has modeled that of a 747, the blue bird’s flight looks more like a falling anvil.
Sure, Twitter stock’s descent has been interrupted by short spells of strength, but they’ve all been stamped out in short order. With its latest downturn, TWTR is approaching another major support level. Unless buyers materialize in force, the bears appear poised to score another victory with a major breakdown.
The recent multi-month consolidation in Twitter stock has taken on the form of a rounded top. If the $24 to $25 support zone gives way, TWTR bulls are in deep trouble (again).
On the implied volatility front, TWTR option premiums are neither cheap nor expensive. With implied volatility in the middle of its one-year range (the IV rank is 43%), traders can really take their pick from the smorgasbord of option plays available here.
If you think Twitter stock continues to plumb the depths through year-end, I suggest long put spreads. Buy the Jan $26/$23 put spread for $1.35 or better. The position consists of buying to open the Jan 26 put while selling to open the Jan 23 put. The premium received from the short $23 put helps reduce the overall cost, and therefore risk, of the position.
Your risk is limited to the initial $1.35 debit and will be lost if Twitter stock price sits above $26 at expiration. The max reward is limited to the distance between strikes minus the net debit, or $1.65, and will be captured if Twitter stock price can fall below $23 by January expiration.
Traders looking for a little more time for Twitter stock to make the required drop to $23 could use March options instead.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
