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The Contrarian Case for a Twitter Inc (TWTR) Stock Earnings Rally

Twitter stock is oversold, trading near all-time lows and near-universally hated

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A short-squeeze situation is also a possibility, if a remote one. Following a 7% jump in short interest during the most recent reporting period, more than 70 million shares of Twitter stock are now sold short — representing a sizeable 11.4% of the stock’s float. I wouldn’t expect long-term TWTR bears to cover on a post-earnings rally, but the weaker hands could be forced into buying back their bets and adding to a short-term spike.

Twitter stock
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Finally, options traders appear to be preparing for a short-term jump in Twitter stock. The 28 April put/call open interest ratio currently rests at 0.37, with calls nearly tripling puts among those options most affected by TWTR’s earnings report. This ratio rises sharply to 0.77 for the May series, reinforcing the idea of a short-term, earnings induced rally.

Overall, 28 April implieds are pricing in a potential post-earnings move of about 9.5% for Twitter stock. This places the upper bound at about $15.87, while the lower bound lies at $13.13. Should Twitter surprise with next week’s report, the shares could easily challenge resistance at $16 after overcoming their 50-day moving average near $15.50. Meanwhile, the $14 region remains a firm floor for TWTR stock, barring anything short of a complete debacle.

2 Trades for Twitter Stock

Call Spread: For those looking to take a risk and bet on a contrarian post-earnings rally for Twitter stock, a May $15/$16 bull call spread has plenty of potential. I’m looking at May so as to provide more room for the rally to play out, and because 28 April implieds will eat into returns.

At last check, the May $15/$16 bull call spread was offered at 27 cents, $27 per pair of contracts. Breakeven lies at $15.27, while a maximum profit of 73 cents, or $73 per pair of contracts, is possible if Twitter stock closes at or above $16 when May options expire.

Put Spread: For those looking for a more conservative play (relatively speaking), then a 28 April $13 put should remain out of the money through expiration. At last check, this put was bid at 19 cents, or $19 per contract.

As long as TWTR trades above $13 through the close of trading next Friday, traders who open this position will keep the initial premium received. However, if Twitter stock trades below $13 before expiration, you may be assigned 100 shares for each contract sold at a cost of $13 each.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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