To buy Twitter Inc (NYSE:TWTR) and hope for a buyout has been a losing temptation for most investors. Problem is, simply buying calls on TWTR stock has been equally as frustrating.
But all is not lost.
You can profitably trade Twitter, as I have recently shared with this long trade using Tesla Inc (NASDAQ:TSLA) profits to fund it. Today, though, I need to set a new entry point for another purpose.
Many people on Main Street love Twitter, but Wall Street just can’t figure out the stock. At current levels, TWTR stock is but a fraction of its $74-per-share highs from 2013. Fundamentally, management has proven it’s not capable of delivering on promises. So for the past 18 months, the main thesis has been to go long Twitter on the hopes of a buyout.
But “hopium” is a drug, not a strategy.
I plan to trade Twitter stock without being exposed to ineffective leadership. Instead, I’ll rely on investor confidence. While I don’t trust the upside in TWTR, I see value at certain levels — and sell risk below them.
How to Trade TWTR Stock Here
The trade: Sell the TWTR Sep $13 put. This is a bullish trade for which I collect 85 cents per contract. This gives me enough room for error for a 75% theoretical chance of success. In the worst case scenario and if I am assigned the stock, I break even at $12.15 per share.
I do have to note that TWTR stock has technical risk that could carry it down to $12 per share. Not all patterns price out to perfection and even then, this would put me long Twitter at a 20% discount from here.
Usually I like to balance my trade by selling opposing upside risk. In this case — and for fear of headlines — I will opt out. I feel confident that I will be able to manage my longer-dated risk against the short-term price gyrations.
To mitigate the naked risk, I can modify the trade into a credit put spread instead. The TWTR Sep $12/$11 yields 25% on money risked. This is less profit, but with finite risk.
Options are dangerous, so I only sell naked puts if I am willing and able to own TWTR stock at the strike sold. But on the flip side, I am not required to hold my trades open through expiration. I can close them at any point 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.
