After a massive rally on unfounded takeover rumors, shares of Twitter Inc (NYSE:TWTR) have fallen back sharply to the major $18 support level. I expect Twitter stock to hug this support line over the near term and trade sideways as TWTR stock digests its recent volatile price action.
TWTR Stock Charts
Click to Enlarge As the chart clearly shows, Twitter has been on a wild ride over the past month, moving from the $18 level on Sept. 13 to a high of $25 on Oct. 5 on rampant takeover speculation. TWTR stock then went into free fall, crashing back to the $17 as the acquisition chatter proved to be baseless.
TWTR stock now is positioned right back at the $18 level, as both bulls and bears are left licking their wounds.
Given the recent volatility and price action, I look for TWTR stock to consolidate around this critical $18 support level over the next week.
The price action over the past three days further confirms the consolidation thesis, as the doji candlestick pattern from Oct. 10 highlights. TWTR stock broke the $18 support level, trading down to a low of $16.93 intraday before reversing course to close near the opening price.
Click to Enlarge This type of price action many times signifies a reversal in the trend, as sellers have become exhausted. The ability to hold the $18 level over the following two days is further affirmation.
In my previous post on TWTR on Sept. 15, I suggested playing for a bounce off the $18 level, which ended up working out in dramatic fashion. Given the magnitude of that bounce and the equally stunning subsequent crash, I believe TWTR stock is exhausted both to the upside and the downside.
While the price of Twitter stock is back to the same level as a month ago, implied volatility (IV) has risen dramatically in that time frame, as the previous chart shows on the bottom panel. With TWTR IV now at recent highs, option selling strategies are favored to take advantage of comparatively rich option premiums.
One of the big advantages of option strategies is the ability to construct a trade that fits your viewpoint. With stocks and futures, you are either long or short. Options, however, allow you to position for profit if your expectation is for sideways price action.
Twitter Trade Ideas
Sell Oct $20 calls and buy Oct $22 calls. At the same time, sell TWTR Oct $17 puts and buy TWTR Oct $15 puts for a combined credit of around 60 cents. These are the traditional monthly options that expire Oct. 21.
With earnings due Oct. 27, I want the trade to expire before then to avoid the earnings-related risk.
The spreads (termed an iron condor) should be executed simultaneously to avoid price risk. Maximum gain on the trade is $60 per spread, with maximum risk of $140 per spread. Return on risk is 42.9%.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
