TWTR Stock – Twitter Inc Is NOT Hopeless!

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I recently wrote about a winning short trade for Twitter Inc (TWTR), but today, I want to set up a pair trade to profit from a rally in TWTR stock.

Twitter stock chart TWTR
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I’ve had good luck trading Twitter shares via various options strategies, though this time, my thesis for going long on TWTR stock is merely a pure gamble on a buyout headline of some sort. Thus, I want time on my side, and I want as little immediate risk as possible.

Whether you’re bearish or bullish on Twitter, it’s hard to argue that the Twitter platform doesn’t have value as an asset. Someone can figure out how to monetize it — I just don’t think it’ll be TWTR management that does it.

Twitter stock has broken, falling more than 30% in 2016 and more than 60% in the past 12 months. What hasn’t broken is the value of the Twitter platform to its users.

I am a chronic Twitter user. I actively tweet stock market related notes on a daily basis. More importantly, Twitter is my primary source of news. I don’t watch any single news outlet — I just watch the headlines come through my Twitter feed within seconds of occurring, and I decide what to read.

I’m not alone. Maybe it’s not stock news — maybe it’s celebrity news, maybe it’s sports news — but millions upon millions of people use it the same way.

So yes, I’m a little bullish here.

Twitter (TWTR) Stock Trade

I could buy TWTR stock and risk $14.40 per share, but I’d rather use the options market to set bullish trades where I can risk virtually nothing.

This will be a pair trade: first, a debit to set a long call position, then a bullish position that gives me the opportunity to collect premium.

Trade #1 – Bullish debit calls: Buy the Jan $15/$17 TWTR debit call spread. This a bullish position for which I pay 70 cents per contract. This is my maximum potential loss. I stand to gain $1.30 per contract if Twitter rallies through both legs by mid January. I like to buy my debit spreads near the money so I only have to guess the correct direction of the move, not the magnitude.

I am a fundamental trader so I don’t like to risk money on trades that require a headline to win. So I want to mitigate my risk. I can do this by adding a second trade using puts.

Trade #2 – Bullish credit puts: Sell Jan $10 TWTR put. This is a bullish trade for which I collect 74 cents per contract. This opens the downside risk. This obligates me to buy Twitter stock at $10 per share if it falls below my strike price before expiration. I would then be put the stock, and would suffer losses should TWTR fall lower than $10 per share. So you only want to sell puts if you’re willing and able to buy TWTR stock at $10 per share.

Ideally, I want Twitter stock to rally through January 2017. Then, the entire premium in the call spread is pure profit since my base cost would then be zero. I can then sell the debit spread and let the sold puts expire worthless for maximum gain.

If TWTR is higher than $17 per share, the maximum value of the debit call spread should be close to $2 per contract of pure profit.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic. and stocktwits @racernic.

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Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2016/05/twtr-stock-twitter-inc-not-hopeless/.

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