Twilio Inc (NYSE:TWLO) continues to enjoy analyst support and buzz of even bigger things to come. But it’s time to keep your head out of the clouds and look at other, more sobering things, if you’re a bull on Twilio stock.
It hasn’t been long since I last wrote about Twilio stock — bullishly at that, I might add. The trade idea failed to work based on our discussed position criteria and risk management. But does a lower price tag on TWLO mean there’s added value?
I don’t believe so. Absent profits, cash flow and possible testing of all-time lows trump the cutting-edge cloud technology coveted by top-notch clients Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB), Home Depot Inc (NYSE:HD), Uber, Airbnb and more. At least for the time being.
In fact, another noted worry with TWLO stock is being too fixated on Twilio’s awesome-sounding client list and potential for even stronger relationships.
The story surrounding Twilio takes me back to a similar narrative of great customers, great things to come, heavy spending and no profits. The company in question is cybersecurity outfit FireEye Inc (NASDAQ:FEYE), which has been anything but a great investment over the past couple years.
Twilio Stock Chart
My philosophy is it’s OK to be fooled once, but learn from it, and don’t be a victim a second time. Twilio intuitively feels and looks a bit more like a repeat situation worth avoiding.
Since our recent coverage on TWLO, the price action has been negative. It also has been sufficient to believe avoiding Twilio stock at current levels is a good policy.
Click to Enlarge
As such, there is the chance a price reversal could occur without a full-fledged test of the $23.66 low. But I’m wary of trying to participate as a bull right here, right now.
Again, Twilio reminds me of FEYE, which surged higher initially, then turned and remains bearishly lower years after the go-go growth crowd tired of the story and value traders; still yet to find evidence off the chart of a bottom to nibble on.
Twilio Stock Credit Spread Strategy
Our chart outlook for Twilio stock undoubtedly sounded cautious. But that’s not to suggest this strategist is overtly bearish either. In fact, after reviewing the options on TWLO, I like the idea of trading out-of-the-money put spreads.
Consider the TWLO Feb $23/$21 put spread for a credit of 35 cents or better, compared to a theoretical fair value price of 38 cents.
Some may recognize the position as a bull put vertical. I refrained from using the word “bull” in the description, considering the spread collects the credit as long as TWLO doesn’t fall more than 18% from its current price of $28 to below $23 at expiration.
If Twilio were to crash that violently, we could have a practical discussion about value. At that point, TWLO stock would be more than $3.50 below its all-time low … and the trader still would be in position to capture the full credit.
Of course, if things like Twilio’s Feb. 9 earnings announcement put the kibosh on future growth expectations and shares really, really take a hit, it’s nice to know that the trader’s worst-case scenario is either $1.65 worth of risk, or owning Twilio at a discounted price of $22.65 or better.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. 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.
