Trade Twilio Inc (TWLO) Stock Without a Worry

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Wall Street absolutely hated Twilio Inc’s (NYSE:TWLO) earnings report. TWLO stock fell 25% on the event, as expectations were clearly out of whack with reality. Regardless of the reason for the drop, TWLO stock could have served as the poster child for the saying, “never catch a falling knife.”

In that sense, TWLO stock was a giant machete with a two-inch handle and I was going to lose fingers had I tried to grab it at the time. Instead I shared a bullish trade that paid quickly. It was an alternate to risking digits by buying the stock with no buffer.

I collected a high premium for selling puts when the shares were under pressure. Then the stock rallied thereby relieving the pressure, so I could buy them back for a profit.


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Fundamentally, TWLO management needs to prove themselves worthy of Wall Street’s trust. The model will remain under threat until then and the stock is not cheap.

Analyst expectations are spread among the top three tiers so the threat to downgrades is moderate.

Today, and with profits in hand, I want to repeat the process, but on a different time frame. I want to be absolutely clear that this trade still remains a speculative one where conviction is shaky, so I have to keep the risk size to a level that won’t break my heart or my piggy bank.

The Bet: Sell TWLO 7 July $22.50 puts and collect 60 cents per contract. Again here I am betting long and that price will stay above $22.50 through early July. Otherwise I have to buy TWLO stock and suffer losses below $22 per share. Selling naked puts comes with grave risk and I only do it if I am willing and able to buy the stock. Otherwise I can use spreads instead.

The Alternate: Sell TWLO 7 July $23/22 credit put spread. Here my risk is well-defined and much smaller than the naked puts. Yet the spread can still yield 20%. Compare that with needing to risk $25 per share now with no buffer then hope that TWLO stock rallies 20% from here just to match the performance of the spread.

Selling options is risky, so I only bet what I am willing to lose.

Learn how to generate income from options 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.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/buy-twilio-inc-twlo-stock-without-a-worry/.

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