It seems I underestimated Twilio Inc (NYSE:TWLO) when I last checked in on the stock in mid-January ahead of earnings. I set a target just shy of $30 per share for TWLO stock, and the shares quickly blew through that target and headed even higher. Twilio stock has since pulled back from its recent highs near $35, and with the shares sitting on technical support, now is the time to profit from another upleg for TWLO.
Click to Enlarge With TWLO stock down about 8% in the past week, the talking heads in the financial media have begun to wonder if the shares are a short target. The effect has shaken out the weaker hands for TWLO and alleviated a near overbought situation for the shares.
Additionally, TWLO stock has stabilized near support in the $32 region and near Twilio’s 10-day moving average, providing a potential springboard for the shares going forward.
Sentiment remains thin on TWLO stock, providing ample room for additional coverage. Upgrades are also an option, as Zacks reports that seven of the 10 analysts following TWLO rate the shares a “buy” or better, up from six of 10 in mid-January.
The consensus price target has also moved higher from $38.44 to $39.45. Should more analysts jump on the bullish bandwagon, it could provide additional buying support for TWLO stock.
Short sellers, meanwhile, have increased their holdings amid TWLO’s selloff. During the most recent reporting period, the number of TWLO shares sold short jumped by 7% to 9.8 million shares, or nearly 34% of the stock’s total float. Should TWLO stock head higher once again, it could force these bears to reverse their positions quickly, creating a short-squeeze situation.
If TWLO’s options activity is any indication, these short sellers are more than a bit nervous about a rebound rally. Currently, the March put/call open interest ratio rests at 0.40, with calls more than doubling puts among options set to expire within the next month. Once again, short sellers tend to buy calls in order to hedge their bets against a rally in the shares.
The immediate upside target appears to be the March $35 strike, where peak OI rests for the series. A breakout above $35 could be huge for TWLO stock.
March implieds are certainly pricing in such a breakout, with options anticipating a more than 11% move before March contracts expire. This places the upper bound at about $36 and the lower bound at $28.59.
2 Trades for TWLO Stock
Call Spread: Traders looking to bet on an upside breakout for TWLO stock might want to consider a March $34/$35 bull call spread. At last check, this spread was offered at 29 cents, or $29 per pair of contracts. Breakeven rests at $34.29, while a maximum profit of 71 cents, or $71 per pair of contracts, is possible if TWLO stock closes at or above $35 when March options expire.
Put Sell: Once again, premiums on TWLO options are considerably elevated, making selling premium attractive. If an outright bullish bet on TWLO stock carries too much risk, you might consider a March $28 put sell position. At last check, this put was bid at 37 cents, or $37 per contract. As long as Twilio stock trades above $28 through March expiration, traders pursuing this strategy will keep the $37 premium.
However, if TWLO stock trades below $28 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $28 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.