Twitter Inc (TWTR): Go Long TWTR Stock for Free

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Twitter Inc (NYSE:TWTR) is always a controversial name to trade. Investing in it for the long-term has been a losing proposition. TWTR stock is down 14% for the year-to-date, and longer-term it’s even worse, off 45% over the past 12 months.

TWTR stock chart
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But I have had good luck trading Twitter stock via the options market.

Technically, there is not much to highlight. Fundamentally, Twitter owns a platform that is an asset to users across the planet. It should look like a gold mine to the right mega-cap corporation, but so far, no one has made an actual offer on TWTR stock.

Also, I’m confident that Twitter management won’t figure out how to monetize the value of the platform to its fullest potential. This makes buying the stock for the long-term an iffy proposition.

Instead, let’s use the options market to set up a pair trade that will allow us to go long on TWTR stock for free. I can buy a bullish call position, then cautiously sell puts to alleviate my out-of-pocket expense.

Even though the trades below are bullish, they do not represent my opinion of the value of the company and its P&L. I am merely speculating over a potential Twitter takeover offer.

2 Trades on TWTR Stock

Trade No. 1 – The Risk: Buy a TWTR Sep $20/$21 debit call spread for 25 cents per contract. To profit, we need TWTR stock to rally past both legs before time runs out on the contracts. We stand to theoretically triple our money should Twitter spike in time. The out-of-pocket expense for Trade No. 1 is the max we can lose.

To further lower my out my risk, I will generate potential income by selling bullish risk in TWTR.

Trade No. 2 – The Bank: Sell a TWTR Dec $15/$14 credit put spread for 27 cents per contract. Ideally, I need Twitter stock to stay above $15 per share this year to win.

Either of these trades would constitute a bullish position in TWTR. Taking both of them together would set me long Twitter for zero out-of-pocket expense. If TWTR stays above $15 per share, any credit I collect from the sale of the debit call spread (Trade No. 1) would be pure profit.

Even though these are medium-term trades, I am not obligated to hold them through their expiration. I can close either for partial gains or losses.

It is important to note that these trades will have to survive a couple of earnings reports. Earnings price action can be erratic over the short-term and can cause undue hassles for sold risk.

These trades can be modified in width to fit any account size or risk appetite. For example, we can switch both to $2 wide spread for more dollars at risk. Or we can turn up the risk factor even more by making them both naked trades. However, only sell naked puts if you are willing and able to own TWTR stock at the put strike sold.

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 at @racernic.

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Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2016/07/twitter-inc-long-twtr-stock-free/.

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