It’s no secret that the mega-tech trade is dead since the election. We saw the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) struggle as the small caps made new highs daily. Yesterday, we saw the likes of Apple Inc. (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB) get killed. Strangely, Twitter Inc (NYSE:TWTR) has held its own so far.
Speaking of elections, Twitter is Trump’s favorite new toy. He goes to it like no other high-ranking politician ever has. In the long run, this is good news for its acceptance (and it might even give Twitter stock a slight bump). More people would be interested in it if Trump continues using it while in office.
Unfortunately, I still worry about TWTR stock because of management. So far they have been nothing but a complete disappointment. They couldn’t even handle the sale process of this gem. So I certainly don’t want to buy the stock.
But that doesn’t mean we can’t go long.
The options market gives us several other ways to go long Twitter stock on the cheap. In fact, today, I have a trade that will let us go long TWTR for free.
How to Trade Twitter Stock Here
Trade #1 – The Bet: Sell the TWTR Mar 17 $14 put for 53 cents per contract. By selling the put, we are committing to buying Twitter stock at $14 per share if it falls below it. Anything lower than $13.48 per share constitutes potential losses. Only sell naked puts if you are willing and able to buy the stock at the strike sold.
Even if TWTR stock goes nowhere, we stand to gain the equivalent of 3.7% yield on money risked. And the beauty is that we don’t need Twitter to rally. We merely need it to stay above $14 through March.
The idea here is that we are committing to the long-term view of Twitter (the company), but we’re giving ourselves a 22% price buffer in Twitter (the stock) from current levels. So TWTR would have to make a fresh new low for us to lose money.
Not everyone is open to taking open-ended risk through selling naked puts. Here is another version of the trade using a spread instead.
Trade #2 – The Alternate: Sell the TWTR Jan $15/$14 credit put spread for 14 cents per contract. If successful, this trade would yield 15% on money risked. We need TWTR to stay above my spread through expiration to win.
This trade has a slightly smaller price buffer but in return it offers a limited maximum risk exposure. It would be easier to manage a bad scenario here than the naked puts sold version.
We are not required to hold either of these trades through expiration. We can close either at any time for partial gains or losses.
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.
