There is no doubt that Twitter Inc (NYSE:TWTR) management has so far failed on delivering the potential that Wall Street thought it had. Consequently, TWTR stock is but a fraction of its all-time highs. But it’s not likely headed to zero, so there is a potential income generation opportunity from the “hopium” that still exists in the market today.
I cannot argue for the fundamental strength of TWTR since I have complete faith that management is clueless on that front. Yet, I do believe that Wall Street is still hopeful for a buyout headline to bring that spike in the stock and that is a tradeable notion. No I won’t buy and hold since recently those who fell for the most recent rumor got hurt again. Instead I will use the options markets.
Even though TWTR looks like a lost cause, I can still allocate modest risk with high potential and a respectable payout using options. Just recently I shared a trade on how to generate free profits from TWTR stock and it delivered.
Today I want to share a similar trade but farther out in time and with a slightly bigger buffer from current price. This means that I want to make more room for error just in case TWTR stock continues to disappoint investors.
Click to Enlarge Technically, Twitter stock has defended the $14 area well for the past 12 months. So I will sell risk considering that $14 is a floor but still leave room for more downside just in case the reaction to the upcoming earnings is very negative.
The Bet: Sell the TWTR Jan 2018 $10/$8 credit put spread. This is a bullish trade that has an 80% theoretical chance of success to yield 10% on money at risk. While not terribly exciting, these trades are designed to be boring. When selling risk, boring is beautiful. In other words, after selling my risk, I want nothing to happen so that time kills the premium as designed and I walk away from the trade with maximum gains.
To make this trade a little more exciting and if I am willing to own TWTR stock at $11 per share I could sell a naked put. This would increase the absolute reward, but also would open me up to bigger potential losses.
The Alternate: Sell the TWTR Dec $11 put and collect 60 cents per contract. This set up has a month less on the clock but gives up a little bit of margin for error as my risk is set at $11 instead of $10 per share.
Learn options as easy as 1-2-3 in a personal 1on1 webinar 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.
