After two years of bears giving the “heave-ho-ho-ho” to Twitter Inc (TWTR) stock, investors might finally be receiving a gift on the bullish side of the ledger.
After a 70% decline from its highs two Christmases ago, we’re finally starting to see evidence of some yuletide cheer for Twitter stock.
Yes, TWTR has challenges, but more to the point (and as a recent piece from Motley Fool addresses), Twitter stock isn’t the train wreck that everyone is insisting it is — and it has proven that its platform is a part of today’s social fabric and is here to stay.
Twitter stock’s current forward price-to-earnings ratio of 44 is pricey relative to peer Facebook Inc (FB) with its multiple of 36, but cheaper than LinkedIn Corp’s (LNKD) 64 … and unlike the latter, Twitter is cash flow positive. Further, Twitter’s revenue growth, price-to-sales and price-to-book aren’t just competitive, but actually trump its listed competition.
Another bullish catalyst to consider for Twitter stock is the stewardship of its well-respected and new CEO, Jack Dorsey. Arguably, the company now has someone truly capable of improving Twitter’s business model, which should lead TWTR to further grow and monetize its brand.
Last but not least, depending on whether traders look to the charts for additional support, it is the time of year when seasonality has a way of lifting the downtrodden like Twitter stock.
The expectation: Some short-term strength in TWTR stock could ultimately morph into a larger and new uptrend, which (believe it or not) could be underway right now.
TWTR Stock Daily Chart
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… or do you?
The truth of the matter is that one trader’s bullish channel could also be the other less optimistic trader’s bearish flag. That said, what we feel gives the edge to the former pattern is that the channel lines up nicely with TWTR’s former key low near $29.50, set back in May 2014.
We think the current channel is part of a larger undercut, double-bottom base for Twitter stock. We like this — especially combined with still very sour sentiment toward Twitter and its ability to produce a turnaround, both on and off the chart.
For positioning, what we wouldn’t like to see is Twitter stock below mid-November’s low of $24.90 as that would challenge our bullish channel thesis.
What we’d really like is for Twitter stock to trade higher before hitting initial resistance at $29.50, then more likely zone resistance around $33-$36 as shown in TWTR’s stock chart.
Strategy: Long Calls on Twitter Stock
I like the idea of using an outright January long call strategy, as prices are cheap enough to make this a reasonable play. To boot, January also gives the trader some time on the calendar before time decay becomes an issue.
Also, the channel and larger bottom in TWTR should either be working as intended or have failed by January’s expiration.
To reduce risk, I’d also suggest buying a call only upon a tiny bit of extra trend confirmation from Twitter stock. I’d look to enter if TWTR trades above $26.25 — about 2% to 3% higher from current levels.
Reviewing Twitter stock’s options board for ideas, we like the Jan $27 call for roughly $1.25. This compares to a current price of $1.10, and what traders could expect to pay based on the contract’s current Greeks.
For the price of admission, the trader’s breakeven of $28.25 is still well below initial resistance of $29.51 and what would amount to as a profit of 100% or greater. And should a “ho-ho-ho” rally fail to materialize, a max risk of $1.25 — or the equivalent of about 5% risk — could be further reined in using money management to exit at a predetermined price.
Investment accounts under Christopher Tyler’s management is long Twitter stock, hedged with TWTR derivatives. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
