Twitter Inc’s (NYSE:TWTR) 12-month performance does not reflect the sentiment change in it — it had a mega rally on “hopium” that caught a lot traders chasing the buyout headline. That effort has been frustrating to most TWTR investors.
Instead of chasing a price target, I’ve had success selling risk where Twitter stock is not likely to go. About a month ago, I shared a trade on how to profit from TWTR for free. Even with unfavorable price action, the trade yielded over 30% of its maximum gains.
Click to Enlarge Today, I want to reset for another run at it on this risk-off day in U.S. equities. I designed this setup to be low maintenance to fit my fall schedule. I would describe it as “low and slow.”
The Bet: Sell TWTR Jan 2018 $10/$8 credit put spread. This is a bullish trade on which I collect 30 cents per contract. I have an 80% theoretical chance of collecting 15% yield on my risk.
Usually, I like to balance my trades by selling upside risk, but in this case I will opt out. I don’t want to be caught short in a Twitter buyout-related headline. I am comfortable holding the downside risk with the amount of time left on the clock for this trade.
Management of the Bad Scenario: If TWTR stock falls below my spread, I would likely opt to own the shares at $10 and sell back the $8 long put position. This would put me long TWTR stock at about a 35% discount. In addition, selling back the long leg would lower my breakeven point even further.
Having a big buffer makes it easier to manage the open risk especially through headline periods like earnings. Regardless, I still don’t risk more than I can afford to lose; selling put positions in options near market all-time highs carries risk. It’s my job to make it as much as an educated risk as possible. I don’t throw darts.
Learn options as easy as 1-2-3 here. 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.
