Twilio Inc (NYSE:TWLO) reported earnings recently and TWLO stock saw its value plummet by about 25%. The drop foiled a bullish setup that has its sights set on $34.50 per share. Now, the San Francisco-based company is fighting to hold the $24 level and longs are left hoping for a rebound.
It’s been less than a year since Twilio went public with a huge 160%-plus rally. The rally turned out to be overdone, but this dip back to IPO levels presents an opportunity.
Those who missed entry at the initial public offering now have a second chance. The problem is that when fast moving stocks experience massive gaps in either direction, they sideline most investors. The fears are justified, as falling knives can be tricky, but I can mitigate the risks by using options.
Click to Enlarge Buying Twilio stock for $24 at face value and without room for error seems too risky to me. While the company operates in an exciting arena, there is no guarantee for success.
I am willing to own it for 30% cheaper, however, so I will sell puts against what others fear. Since this remains a speculative name I will use caution leaving a big buffer. After all, TWLO lost the technical advantage and now has more fundamental risk than ever.
TWLO Stock Options
The Bet: Sell the TWLO Jan $16 put and collect $1 per contract to open. I have an 85% theoretical chance of success in retaining the maximum gains. Otherwise, I would accrue losses if price falls below $15 per share. Since markets are at all-time highs, I would buy cheap sacrifice puts to cover the crash scenario for the next few weeks.
If you are not willing or able to own the stock (not even at $16 per share), then consider turning this into a credit put spread. This credit put spread on Twilio stock allows for less risk, yet it still potentially yields 30%. Compare this with risking $24 to buy the shares now and hope that it rallies past $31 to match the performance of the spread.
I will not sell opposing upside risk since the stock has had a giant haircut, which means that I would be selling calls for a deep discount. I could contemplate such an idea, however, if TWLO stock bounces hard off this low.
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.